December can be a busy time of year for all; from holiday parties to business deadlines, it can be difficult to keep up with anything not on your regular to-do-list. With the busyness of the season, there’s a good chance you may have missed the news that on December 19th Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
While the SECURE Act may not immediately impact as many individuals as the Tax Cuts and Jobs Act, passed in December 2017, it does present a reason to review your financial plans. Here are a few of the major changes that will likely impact many taxpayers.
Required Minimum Distributions from retirement accounts will begin at age 72
When we discuss retirement income strategies , one major factor to plan for is Required Minimum Distributions (RMDs) from tax-deferred retirement accounts. In the past, the IRS has required individuals to begin taking, and paying taxes on, distributions from their tax-deferred retirement accounts at age 70 ½ with the minimum distribution amount being determined based on a life expectancy table.
With the passing of the SECURE Act, anyone turning age 70 ½ in 2020 or later no longer has an RMD until the year they turn age 72. This does not prevent you from taking a distribution prior to age 72, it just eliminates the requirement to do so if you do not need the funds before then.
The change to the RMD beginning date did not change your ability to complete a Qualified Charitable Distribution (QCD) at age 70 ½. Individuals who are charitably inclined can make a transfer directly from their IRA to a qualified charity once they attain age 70 ½ without including the amount in their taxable income (The $100,000 per year limit remains unchanged).
Inherited Retirement Accounts must be distributed within 10 years
If you inherit a retirement account from a non-spouse individual whose date of death is 2020 or later, you will be required to distribute the entire account within 10 years of the year of inheritance. Previously, you could “stretch” these distributions over your lifetime which typically lead to smaller distributions over a greater number of years, and likely keeping your income tax lower on the distributions. This “stretch” option is no longer available and may require more thorough planning to determine the best time over the 10-year period to take taxable distributions.
The rule allowing a spouse beneficiary to treat the inherited retirement account as their own remains unchanged at this time. There are also a few other exceptions to the 10-year distribution rule; however, you should speak with your financial planner and tax professional prior to deciding on how best to distribute an inherited retirement account.
Individuals who have named Trusts as beneficiaries for their retirement accounts should take this opportunity to review the trust language and meet with their estate planning attorney to determine if changes need to be made. Trusts that are set up as retirement account beneficiaries may use language requiring the RMDs be paid to the trust beneficiary; however, with the new 10-year distribution rule, there is no RMD until year 10 at which time the entire account must be distributed. This could have a significant impact on the trust beneficiary’s ability to receive income from the trust in the years following the inheritance and their taxable income in the 10th year after inheriting the retirement account.
529 Plans can now partially be used for student loan repayment
For younger individuals still trying to pay off their student loan debt, the SECURE Act added an opportunity to take a distribution from a 529 plan to help with the debt repayment. You may withdraw up to $10,000 over your lifetime from a 529 plan in which you are the beneficiary to help pay down student loan principal and interest. As with all qualified higher-education expenses, the distribution must occur in the same year as the expense, so this benefit only impacts those with current or future student loans.
The SECURE Act also expanded the definition of Qualified Higher Education Expenses to include expenses for Apprenticeship Programs so long as the program is appropriately registered and certified with the Department of Labor.
Before deciding to use your 529 plan for one of these new options, you should discuss the cost and benefits in your situation with your financial planner.
There were other changes included in the final version of the SECURE Act that may impact some of your situations. As our team continues to learn more about the impact of the changes, we will implement those beneficial to our clients on an individual basis. Here is a list of other scenarios that may be impacted by other changes within the SECURE Act:
- Individuals who itemize deductions on Schedule A of their income tax return with significant health care expenses.
- Anyone planning to give birth or adopt a child in the future.
- Anyone still working beyond age 70 1/2.
- Small business owners with a retirement plan in place or looking to establish one for employees.
- Minor children receiving significant unearned taxable income.
If you believe you may be impacted by the SECURE Act, contact your financial planner to discuss, or contact us to discuss if our services would be beneficial to you.
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