Secure Act – Changes Coming
While you were celebrating the turn of a new year, there have been some very quiet changes brewing on Capitol Hill–probably the largest changes to retirement and college savings in a decade. Effective January 1st, 2020, Congress has passed the Setting Every Community Up For Retirement Enhancement Act of 2019 (The SECURE ACT).
Like any new legislation, much of it won’t be relevant to most people, but there are a handful of sweeping changes that will affect most (if not everyone). I figured, why not start off the year with some of the key changes worth noting.
Section 114: Increase in Age for Required Beginning Date for Mandatory Distributions.
This has clearly got to be one of the biggest changes worth noting. Since the 1960s, we’ve been accustomed to knowing that the year we turn 70.5 we must take out that first RMD (required minimum distribution) from our retirement plans. It’s crazy that the age hasn’t moved in almost 60 years, despite massive increases in life expectancy. Moving forward, you don’t have to take that first withdrawal until age 72! Disclaimer if you are already 70.5 prior to this year nothing has changed.
My thoughts: I’m certainly for this provision as it makes sense to have the age of distribution grow with life expectancy. There’s no secret why things haven’t changed–the government likes getting their tax money sooner than later. However if we are trying to encourage retirement health, I think this does a nice job.
Section 401: Modification to Required Minimum Distribution Rules.
Now this RMD thing cuts both ways, as section 401 attacks benefits for that next generation of IRA holders. When inheriting an IRA before 2020, the recommended solution generally was to “stretch” the IRA distributions out over the beneficiary’s lifetime. Therefore if I inherited a parents IRA, I could take minimum distributions out over my lifetime, instead of paying tax on it all at once. Moving forward for non-spouse beneficiaries, you’ll be required to pull out these funds within 10 years of inheriting them.
Some important things to note–this does not apply to spouses, disabled or chronically ill individuals, those not more than 10 years younger than the IRA owner, or children of the IRA owner who have not reached the age of majority.
My thoughts: This is a very interesting provision. It clearly hurts those children that inherit IRA’s post 2019. Again, this is being done to force taxable situations sooner than later, which I get. But, that doesn’t mean that I like it! There may be some more reasons to do Roth IRA conversions in certain situations.
Section 107: Repeal of Maximum Age for Traditional IRA Contributions.
Previously, you couldn’t contribute to a Traditional IRA if you were over 70.5. This change repeals that. It allows those who are 70.5 (and older) and who are earning income to still contribute to a qualified Traditional IRA.
My thoughts: No real downside here as people are living and working longer. This should hopefully incentivize more savings for those employed later in life.
Section 302: Expansion of Section 529 Plans.
This allows a 529 plan to pay up to $10,000 of student loans. Previously, this wasn’t an allowable usage of 529 plan funds. Also, it allows these plans to be used for apprenticeships and homeschooling.
My thoughts: Great! Not that this affects as many people as one would think. I just wish they were a little more generous here–why not allow all the funds in a 529 to be used to pay back loans?
Section 113: Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption.
This change allows up to $5,000 to be taken penalty-free out of a retirement plan if used for birth or adoption expenses. Normally, a 10% penalty would occur.
My thoughts: This is a nice little provision that could help people out during very tough and stressful times. Again, I wish the limits were a little higher. I have three children and I certainly can sympathize to the costs of child birth. I also love that they are doing the same for adoption as well.
It’s fun how law changes these days come with some kind of acronym. Makes it easy to remember doesn’t it?
There are many more provisions in The SECURE ACT, but I wanted to keep it high level for now. For a full list of the law changes, check HERE. Be warned, it will put you to sleep, kind of like every time I studied in college, but I guess that is why they don’t suggest studying in bed!
Feel free to reach out to see how this impacts you and certainly many of you will find some strategies here that will be worth exploring.