New SECURE Law Affects Retirement Goals, Taxes, and More

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The question: what should I know about this new SECURE law which was enacted last month?

The answer: By passing the “Setting Every Community Up for Retirement Enhancement Act,” Congress changed some long-standing rules in three broad categories related to retirement planning. We need to rethink our retirement strategies, tax planning, beneficiary designations and estate planning.

Minimum required distributions

As of January 1, 2020, the new law extends the age to 72 when withdrawals are required from traditional IRAs (from age 70 and a half).

If you turned 70 and a half in 2019, you should still take your RMD for 2019 by April Fool’s Day 2020 at the latest. If you are currently taking RMD, you should continue to take your RMD. This law changes the rules for people who turn 70 and a half in 2020 (or later) and they can defer distributions to 72. (Distributions can be made at any time after age 59.5 without penalty, but still with ordinary income tax.)

The SECURE law does not change the age at which Qualified Charitable Distributions (QCDs) from IRAs are permitted; IRA transfers to charities can still start at age 70 and a half.

As of 2020, the SECURE Act now allows contributions to traditional IRAs in the year you turn 70 and a half and beyond, provided you have earned income. You cannot make traditional IRA contributions for 2019 (previous year) if you are over 70 and a half.

There are no age restrictions for Roth IRA contributions, just the requirement that there be earned income equal to the contribution.

Legacy retirement accounts

If you and your spouse do not spend all of your retirement accounts, your children, grandchildren or any beneficiary other than the spouse must use them up within 10 years of receiving them. Beneficiaries other than the spouse will no longer be able to “extend” the minimum annual distribution requirements to life. Ordinary income tax is due on all IRA distributions, which makes it a great time to do some serious tax planning. Consider a Roth conversion if your marginal rate is lower than that of your beneficiaries. The timing of distributions can be flexible provided that the entire account is emptied by the tenth year.

There are exceptions to the 10-year rule for people with disabilities and minor children who are beneficiaries of IRA accounts, but only until they reach the age of majority.

This rule does not apply to inherited IRAs existing before January 1, 2020.

As an IRA owner, assess the tax cost of Roth conversions. Often, in retirement, marginal tax rates are lower. Who is your beneficiary and who has the highest tax rate?

Surviving spouses who are beneficiaries of their spouse are still allowed to treat their spouse’s account as their own. Choices include opening a Legacy IRA or relinquishing part (or all) of the account. These IRAs can also be converted to Roth IRAs.

Check the beneficiaries on your IRAs. Have you named a trust as the beneficiary of your IRA? If so, reassess the consequences.

Employer pension plans

Small businesses can band together to set up 401 (k) plans. An employer can now get up to $ 5,000 per year for three years to set up a plan, and $ 500 per year for three years to include an automatic enrollment feature. This means that the total tax credit, over three years, could be $ 16,500. An employer must allow 20 unpaid employees in the new pension plan to earn the maximum tax credit possible.

The ceiling for the automatic enrollment of workers in “security” pension schemes is reduced from 10% of wages to 15%.

Part-time employees who work either 1,000 hours throughout the year or who have three consecutive years with more than 500 hours of service are now eligible to enroll in an employer-sponsored pension plan.

Other interesting points

There is a safe harbor for 401 (k) plan sponsors, which makes it easier to include annuities as an option in working plans.

University Savings Accounts (529 plans) can be used for apprenticeships, home schooling, private school fees, or up to $ 10,000 in qualified student loan repayments.

Loans can still be up to 50% of the 401 (k) balance and must be repaid within five years, unless they are borrowed to buy a home.

Penalty-free withdrawals of up to $ 5,000 can be made from a 401 (k), IRA, or other retirement account after the birth or adoption of a child. There will always be ordinary income tax.

Consult with your experts, especially your accountant, estate planning lawyer, and financial advisor. The rules have changed and so have we.

Mary Baldwin, CFP, is a paid, independent financial planner with Baldwin and Associates, located in Indian Harbor Beach, Florida. You can contact her with any questions at 321-428-4555 or Mary@MEBaldwin.com.


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