By Matthew Gaude & Shawn McGuire
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed by the House of Representatives on May 23, 2019, approved by the Senate on December 19, 2019, and signed into law by President Trump on December 20, 2019. It’s the largest piece of retirement planning legislation we’ve seen since 2006—and it greatly impacts how individuals use their retirement accounts.
To help you gain clarity on the SECURE Act, we’ve highlighted the 9 biggest retirement planning changes below.
1. Inheritors: No More “Stretch” IRA Provisions
Up until now, a non-spouse who inherited an IRA or 401(k) could stretch their inheritance out over their life expectancy. For example, a 21-year-old with a life expectancy factor of 62.1 years had over six decades to withdraw funds. (1) But not anymore.
Now, inheritors have 10 years after the account holder’s death to distribute the entire retirement account. This new restriction has major tax consequences as inheritors have shorter distribution periods than ever before. If the beneficiary is the IRA owner’s spouse, RMD’s are delayed until the end of the year that the deceased IRA owner would have reached age 72 (it used to be age 70 ½ prior to the SECURE Act).
However, non-spouse beneficiaries are exempt from this rule if they are a minor child, disabled, chronically ill, or within 10 years of the deceased’s age.
The elimination of the stretch IRA is perhaps the most devastating change in the SECURE Act. If you plan on leaving an IRA to a non-spouse beneficiary—or you’ve inherited an IRA—it’s crucial that you speak with a professional on how you can reduce your account’s tax burden.
2. Savers: No More IRA Contribution Age Limits
Before the SECURE Act, you couldn’t contribute to an IRA once you hit age 70½. Now, there’s no cap. This means any working individual—regardless of age—can contribute to a traditional or Roth IRA. For 2020, the contribution limit is $6,000 or $7,000 if you’re at least 50. (2)
3. Retirees: The RMD Age Is Now 72
Instead of having to take required minimum distributions (RMDs) at age 70½, the new age is 72. This means retirees get 1.5 more years to build their retirement accounts and defer distributions.
This new age limit is for anyone turning 70½ in 2020 and beyond. If you turned 70½ in 2019, you’re still required to take RMDs in 2020. While the beginning age for RMD’s has been increased to 72, taxpayers can still make Qualified Charitable Distributions from their IRA as early as 70 ½. Qualified Charitable Distributions (QCD’s) are not taxable, the limit is $100,000 per year, and the distribution must be made directly to the charity.
4. Part-Time Workers: You Now Have Access To A 401(k)
Part-time workers are eligible for a 401(k) as long as they:
- Have worked at least 500 hours a year (or 9.6 hours a week) for at least three years
- Are at least 21 years old by the end of the three-year period
5. Parents: Penalty-Free Withdrawals For The Birth Or Adoption Of A Child
Parents with a retirement plan can make a penalty-free withdrawal of up to $5,000 per child to help cover the expenses of a new baby. Distributions will be treated as taxable income. Each spouse can withdraw $5,000 from his or her own account, penalty-free. Taxpayers have one year from the date the child is born, or adoption is finalized, to withdraw the funds from the retirement account without paying the 10% penalty. Before the SECURE Act, parents paid a 10% penalty fee if they used retirement money for the birth or adoption of a child.
6. Small Business Owners: Get Tax Relief For Offering Retirement Plans
The start-up costs for retirement plans can be costly—especially if you’re a small business owner. Thanks to the SECURE Act, the small business tax credit is increased from $500 a year to up to $5,000 a year for three years. This change is put in place to encourage more small business owners to offer workplace retirement plans for employees. Employers will get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA with “auto-enrollment,” on top of the start-up credit they already receive.
7. Grad Students And Care Providers Are Allowed To Contribute To IRA’s
Prior to the SECURE Act, contributions to a retirement account could not exceed earned income. Graduate and post-doctoral students receiving stipends were not allowed to contribute. Similarly, payments that foster-care providers received for the care of disabled people in their home did not quality.
Under the SECURE Act, the amount paid to graduate, post-doctoral, research students and care providers will be treated as compensation for purposes of making IRA contributions.
8. Changes In 401(k) Plans
The SECURE Act will permit employers to offer annuities as investment options within 401(k) plans. The SECURE Act requires 401(k) plan administrators to provide “lifetime income disclosure statements” annually to plan participants.
9. 529 Plans
Currently, 529 education savings plans must be used for qualified education expenses. The SECURE Act expands the definition to include student loan payments and costs of apprenticeship programs up to $10,000.
Tax Extenders Bill Revives Zombie Tax Breaks…Again!
Congress has once again come through at the last minute to extend tax breaks in what is being called “The Taxpayer Certainty and Disaster Relief Act of 2019.” The following tax benefits for individuals are reinstated retroactively to 2018, and made effectively only through 2020.
- The exclusion from gross income for the discharge of certain qualified principal residence indebtedness
- Mortgage insurance premium deduction; and
- Deduction for qualified tuition and related expenses
- The adjusted gross income hurdle rate that must be exceeded to deduct qualified medical expenses remains at 7.5% of AGI for 2019 and 2020 (it was already lowered to 7.5% for 2018 by the Tax Cuts and Jobs Act), lowered from the previous rate of 10% of AGI in 2017.
- Finally, this bill provides for Qualified Disaster Distributions from retirement accounts. Individuals eligible for this relief are those who have principal residences in a Federally declared disaster area, and who suffered an economic loss as a result of that disaster. The disaster must have occurred from January 1, 2018, through 60 days after the enactment of the law.
How We Help
The SECURE Act has completely overhauled how we approach retirement planning. Most of these changes are for the good, but some—such as the elimination of the stretch IRA—may require creative tax planning strategies for those with high retirement account balances.
At Live Oak Wealth Management, we’re here to answer any questions or concerns you may have about the newly instated SECURE Act. We welcome the opportunity to review your financial situation to let you know how these changes may impact you most. To get started, call our office at 770-552-5968 or email firstname.lastname@example.org. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional.