Feel free to give yourself a break if you missed the passage of the SECURE Act last month. It passed on December 20, right in the middle of the holiday season. Don't feel guilty if the news got lost somewhere between the roasting chestnuts and the pumpkin pie.
But that doesn't mean the SECURE Act isn't important. It contains numerous new wrinkles for Americans in all phases of their financial lives, and we believe that a handful of the act’s provisions will affect our clients.
Here’s what we think you should know.
If you're saving for college or if you have student loan debt:
You should know that the SECURE Act allows you to use up to $10,000 in 529 Plan funds to pay off student loan debt. This part of the act is retroactive, meaning you can use 529 Plan funds to pay off debt incurred in previous years. To take advantage of this change, please make sure the student loan debt you’re targeting is considered a “Qualified Education Loan Repayment.” You can reach out to our team to see if your loans qualify.
If you own a small business:
You should know that the government has enhanced its rewards for offering a retirement plan for your employees. You can now earn up to a $5,000 tax credit for establishing a workplace retirement plan and an additional $500 tax credit for incorporating an auto-enrollment provision. Please note that the number of employees you have will affect how much of a credit you can earn.
The SECURE Act also has made it easier for long-term part-time employees to participate in workplace retirement plans.
If you stand to receive an inheritance from someone other than your spouse:
You should know that the SECURE Act ended the lifetime stretch provision for non-spouse IRA beneficiaries. In our view, this is the most important provision in the new law…and we don't like it. Whereas an IRA beneficiary could previously stretch distributions throughout his or her lifetime, all inherited IRA money must now be distributed within 10 years. In some scenarios, this could lead to unwanted income (and therefore unwanted taxes) during a person’s highest-earning years.
The good news here is that this provision isn’t retroactive. Current inherited IRAs can be stretched out for the lifetime of the beneficiary. But if you stand to inherit an IRA from someone who dies after January 1, 2020, you’ll need to do some proactive tax planning to help decide when to take the money out of the inherited account. If you’re at all concerned here, we recommend contacting our team for further discussion.
Two other points are worth noting. First, this provision doesn’t affect “Eligible Designated Beneficiaries,” including:
- Spousal beneficiaries
- Disabled beneficiaries
- Chronically ill beneficiaries
- Certain minor children
- Beneficiaries who are not more than 10 years younger than the recipient (source: Kitces.com)
For example, a 50-year-old husband wouldn’t need to consider this new rule in regards to an IRA he might inherit from his 50-year-old wife. But he would need to consider this new rule in regards to an IRA he might inherit from his 85-year-old father.
Secondly, the SECURE Act has complicated the rules around naming a trust as a beneficiary for an IRA. If you’ve named a trust as a beneficiary for an IRA, we suggest talking to our team here at CAMG or contacting your estate planning attorney.
If you’re aged anywhere from 69-72:
You should know that the SECURE Act has raised the age at which you must start taking Required Minimum Distributions from 70 ½ to 72 and that it has eliminated restrictions on IRA contributions after age 70 ½.
On the first point, this means that folks with IRAs and 401(k) and 403(b) plans will be able to delay distributions from their tax-advantaged retirement accounts a bit longer. We view this as a good thing. It increases the window between someone’s full retirement age for Social Security purposes and his or her RMD age. We see potential tax planning benefits as a result.
On the second point, removing the restriction on IRA contributions allows workers with earned income to continue using tax-advantaged accounts.
The Bottom Line
If you have any questions about how the SECURE Act will affect your financial plan, please contact us as soon as possible. We'd be happy to discuss all of this information further and make any needed adjustments to your plan.
As always, you can schedule an appointment or a phone call with one of our team members by clicking here or clicking the button below!