The SECURE Act is Finally “Secured”December 30th, 2019 by Jim Allen
In our September 17th article, we discussed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. After several ups and downs through the legislative process, Congress finally passed the bill and it was signed into law by President Trump on December 20th. Most of the items discussed in our September article ended up in the final bill, but there were also some “tax-extender” items included at the last minute. In general, the new laws are favorable and there is something of benefit for everyone in the final legislation. While not a comprehensive list of all of the items contained in the bill, here are the ones that will have the most impact on our clients:
• Delayed required minimum distribution age: The prior age when distributions from most retirement plans were required to be started was 70 ½. This legislation changes the start date to age 72, allowing funds to continue growing tax deferred for a little longer. Using a full year age (72) instead of a ½ year age (70 ½) also makes it easier to figure out when benefits are actually required to be started. This rule applies to all retirement plans, not just IRAs.
• Contributions to IRAs are now allowed after age 70 ½: Previously, once you hit age 70 ½ you could not contribute to an IRA even if you were still working. The new law lifts that restriction and allows you to contribute to your IRA as long as you are working regardless of age. However, this rule does not eliminate the need to also take required distributions starting at age 72.
• Changes to “Inherited IRA” required minimum distributions: If someone inherits an IRA or retirement plan today, they can take out the remaining funds over their life expectancy. This can allow for distributions to be “stretched out” over several years or decades while allowing the rest of the money to continue growing tax deferred. Under the new rule, most people will have to take out inherited IRA funds over no more than 10 years. This will accelerate the liquidation of the inherited retirement account which will also accelerate taxation.
• Penalty free withdrawal for birth or adoption: The SECURE Act allows for up to $5,000 to be withdrawn 10% penalty free for expenses related to a birth or adoption of a new child.
401(k) Plan Changes
• Retirement plan loans through credit card eliminated: Many employer retirement plans allow employees to take loans from the plan (subject to certain limits and restrictions). While taking a plan loan is not always the best idea, it does make sense in some cases. But, some plans are currently providing loans via the use of a credit card which is causing plan participants to spend their retirement funds on small purchases. This provision eliminates the availability of plan loan credit cards.
• Increased access to 401(k) plans for long term part time employees: Under current law, employees must work more than 1,000 hours to be eligible for plan participation. The new rule allows employees who work more than 500 hours for 3 consecutive 12 month periods to be eligible to participate. Given that the trend has been for fewer full time and more part time workers, this will have a favorable impact for employees trying to save for retirement.
• Revisions to 401(k) Plans for Employers: The SECURE Act also has several new provisions for employer provided retirement plans like 401(k)s. These include enhanced availability of multiple employer plans and the ability to use annuities in qualified retirement plans.
Tax Extenders and Other Changes
• Using 529 plans to pay toward student loans: This provision allows up to $10,000 from education savings accounts (529 plans) to be used for student loan debt repayment and would qualify as a qualified higher education expense. Under current law, qualified higher education expenses only applied to books, tuition, fees etc. This law change will allow people with student loan debt to be able to pull up to $10,000 tax free to pay down student loans.
• Income level for medical expense deductions reduced: Under current rules, your medical expenses must exceed 10% of adjusted gross income (AGI) before they can be deducted. The prior tax law allowed deductions when they exceeded 7.5% of AGI. The SECURE Act extended the 7.5% threshold for 2019 and 2020.
• “Kiddie Tax” rules reinstated: Another tax extender was reinstatement of the so-called kiddie tax where a child’s unearned income is taxed at the parent’s tax rate instead of their own. The current law taxed a child’s unearned income at trust rates which are typically higher than a parent’s.
Other than the tax extenders, these rules are applicable January 1, 2020 and are permanent. We will be reviewing all of your financial plans to evaluate the impact the SECURE Act will have on your individual situation. If you would like more information on the SECURE Act, please contact our office.