By Bob Palechek, CPA | February 7, 2020
The U.S. Government is finally reacting to its concern that Americans are not saving enough for retirement. (About one-quarter of working Americans have no retirement savings.) So, Congress started writing bills and resolutions that would make it easier for certain employers to offer retirement plans to their employees – and for workers to save more money.
The name they gave it was the SECURE Act: the “Setting Every Community Up for Retirement Enhancement” Act of 2019. After months of delays, Congress finally passed the Act in December 2019 by tucking it into an Appropriations bill that had a year-end deadline.
But, not all of the parts of the new law will “enhance” everyone’s retirement, especially someone planning to use a specific strategy that benefits future generations. First, let’s see the five key positive changes, and then the one that may call for some crucial retirement plan adjustments.
Five Key Positive Changes
- Before the SECURE Act, you had to distribute a minimum amount of your qualified retirement accounts (called RMDs) beginning in the year you turned 70½. (In the first year, the percentage to be distributed is about 3.65% and increases each year.) For higher net worth taxpayers, being forced to add this income to Social Security benefits can create a sudden jump in the taxes due. This Act raises the starting age to 72 for anyone younger than 70½ at the end of 2019.
- Until this Act passed, you were allowed to contribute to a Roth IRA after age 70½, but not to a tax-advantaged traditional IRA. The Act removes the age limit on traditional IRAs. Yeah! Please keep in mind that you still need “earned” income to contribute. Part-time wages or consulting income (Sch C) works just fine.
- Thanks to the Act, you now have increased access to lifetime income options (annuities) inside qualified retirement accounts.
- If student loans somehow figure into your finances and you own a 529 Plan, you can now take a tax-free distribution from the plan to pay toward qualified student loans. The lifetime limit of $10,000 per child means a maximum of $40,000 for four children, for example. You cannot take a deduction for any student loan interest associated with these payments, but that deduction was phased out for many taxpayers in any case. What isn’t clear yet is how the states will handle this and which ones will conform or not.
- The Kiddie Tax is going back to the old rules, starting in the tax year 2020. Changes in the Tax Cuts and Jobs Act of 2017 had some undesired tax effects as soon as they were implemented in 2018. Some families with minor or college-age dependents found they were hit with high tax rates on their Social Security benefits or taxable scholarships received by the kids. Taxpayers can opt out when filing for 2019, and can also amend their 2018 returns if it makes sense.
A Change with Cause for Concern
This change – the elimination of the lifetime Stretch IRA – was placed in the law to help offset the government’s overall decrease in tax revenues caused by the Act’s various positive changes. (And if it is good for the government, you should question if it’ll be good for you.) Before the Act, you could use the Stretch IRA provision when leaving an IRA to your kids.
It allowed them to spread the required distributions (RMDs) over their lifetime. For a middle-aged child with good earnings, for example, this protected the inherited money from very high tax rates. Now, instead of lifetime distribution, the new Act says the IRA has to be distributed in 10 years or less. Ouch!
A good Certified Financial Planner can find workarounds for retiring and retired clients. For example, by making Roth conversions during low tax rate years before death, you can leave more tax-friendly IRAs to the kids. This change only applies to IRAs inherited after January 1, 2020. And, the Act exempts surviving spouses, minor children, and individuals who are not more than 10 years younger than the decedent.
If any of these changes can potentially impact your existing retirement plans, be sure to check with your financial advisor for a re-evaluation. Besides what is in this summary, many nuances exist that could be even more beneficial to you.