On January 1st 2020, the SECURE Act, or the Setting Every Community Up For Retirement Enhancement Act of 2019, will become effective. There are many provisions of the new law. This blog post will cover a brief summary of provisions that are most likely to have a financial planning impact.
The Required Beginning Date age has increased from 70.5 to 72 years old.
SEC. 114. INCREASE IN AGE FOR REQUIRED BEGINNING DATE FOR MANDATORY DISTRIBUTIONS.
Anyone with retirement accounts has to begin distributing money from their tax-deferred retirement accounts at their required beginning date in order to avoid being penalized by the IRS. These distributions are referred to as required minimum distributions or RMDs. Prior to 2020, the required beginning date age has been 70.5. Beginning in 2020, retirees will have another 1.5 years, or until age 72, until they have to take distributions. This is an advantage to retirees because it allows retirement accounts to accumulate tax-deferred for longer.
The SECURE Act allows for all individuals with earned income to make Traditional IRA contributions.
SEC. 107. REPEAL OF MAXIMUM AGE FOR TRADITIONAL IRA CONTRIBUTIONS.
Prior to the SECURE Act, in the year that individuals turned 70.5, they could no longer make contributions to Traditional IRAs. Beginning in 2020, the SECURE Act will allow anyone with earned income to make a Traditional IRA contribution, regardless of their age.
Inherited IRAs can no longer be ‘stretched’ as long.
SEC. 401. MODIFICATION OF REQUIRED DISTRIBUTION RULES FOR DESIGNATED BENEFICIARIES.
If you inherited an IRA in the past, an option you generally had was to stretch the distributions over your life expectancy, based on your age. That was beneficial because it allowed the funds to grow during those years. Beginning with deaths after December 31st, most beneficiaries will now have a rule requiring the account to be emptied by the end of the tenth year following the death of the original account holder.
It is important to note that the new 10-year rule will not apply to everyone. Surviving spouses and minor children, disabled or chronically ill beneficiaries, and beneficiaries not more than 10 years younger than the IRA owner are generally exempt from the new 10-year payout rule.
Adopting or having a baby is a new 10 percent early withdrawal penalty exception.
SEC. 113. PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS FOR INDIVIDUALS IN CASE OF BIRTH OF CHILD OR ADOPTION.
Generally, if you take a distribution from your IRA prior to age 59.5, you are required to pay a 10% penalty on the distributed funds. There are several exceptions to that penalty, such as withdrawals used to pay for qualified higher education expenses or a first-time home purchase. The SECURE Act added an additional exception to the list. Beginning in 2020, individuals can withdraw up to $5,000 penalty-free for one year after the birth or the finalized adoption of a child.
529 Funds can now be used for certain expenses for registered apprenticeship programs and qualified education loan repayments.
SEC. 302. EXPANSION OF SECTION 529 PLANS.
Under the new law, tax-free distributions can be made from 529 plans in order to pay for registered apprenticeship programs and up to $10,000 in student loan payments. Apprenticeship programs are programs offered by employers that provide on-the-job training to prepare employees for a particular career. Under the SECURE Act, tax-free distributions from 529 plans can pay for fees, textbooks, supplies, and equipment for these programs.
Aside from these five items, there are several other new rules that could impact you. For a detailed list of changes, you can view the bill signed by congress here. If you have any questions on how these changes may impact you directly, you can always contact us.
Happy New Year!
Source: https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf
