Just as the holidays arrived, congress decided to pass legislation impacting retirement planning and the tax code. Both the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Taxpayer Certainty and Disaster Relief Act of 2019 were passed and could have a meaningful impact on your finances. There were many provisions in these bills; however, this article will focus on five key provisions likely to affect you going forward.
1) Eliminating the “Stretch”
Previously, most non-spouse beneficiaries of inherited retirement accounts could stretch distributions over their life expectancy. Under the SECURE Act, the entire inherited retirement account must now be distributed by the 10th year following the year of inheritance. This could meaningfully accelerate income taxes due on these funds in certain circumstances and is an adverse change for many families. Relevant details:
- This does not apply to leaving the retirement plan to your spouse.
- This does not apply to those who have already inherited a retirement account.
- If your estate planning documents leave your retirement account to a trust for the benefit of your heirs, you may want to re-confirm that this is the best decision.
- If your taxable (i.e. non-Roth, non-basis) retirement plan balances are likely to be high enough that withdrawing one-tenth each year for the ten-year deferral period would be enough to place your heirs into a higher income tax bracket than you are currently in, then it may be prudent to consider Roth conversions.
2) RMDs Starting Later
For those who were not yet 70 ½ at the end of 2019, RMDs (Required Minimum Distributions) from retirement plans will now begin at age 72 rather than age 70½. This extra year and a half allows savers additional time to grow their assets tax-free before having to start taking taxable distributions. QCDs (Qualified Charitable Distributions) continue to have a 70½ starting age.
3) No Age Limit for IRA Contributions
One small, yet favorable, change is the elimination of an age limit for IRA contributions. Those over age 70½ who have earned income can now contribute to an IRA. This allows those who are still working to continue making tax-advantaged retirement account contributions. This change reflects the reality that many Americans are working and living longer.
4) Change in the “Kiddie Tax”
The change in the “kiddie tax” (basically tax on unearned income for a child under 18, or under 24 and a full-time student) that was made by the 2018 Tax Cuts and Jobs Act (TCJA) is repealed. Those earnings will again be taxed at the parent’s marginal rate as they were previously, rather than at trust tax rates. For children with meaningful unearned income, this will typically result in a lower tax bill. Taxpayers can also elect to apply the new rules to 2019 and 2018.
5) 529 Plans Now Cover Student Loans and Apprenticeships
The SECURE act further expands the list of qualified education expenses which 529 plan funds can be used to pay for. First, up to $10,000 may be distributed for “Qualified Education Loan Repayments” and may cover interest and principal. Second, apprenticeship programs are now considered a Qualified Higher Education Expense and may be paid for with 529 plan funds.
With this recent legislation, there are many potential impacts to your finances, especially retirement planning. If you would like to speak with a financial planner about how these developments may affect you, schedule a call today.