This important update is presented to you by the Krilogy Financial Planning Committee. We are committed to keeping you informed about developments that may affect your plan, and what actions are being taken to keep it on track. When changes occur in the basic framework or key aspects of your financial universe, we serve as your trusted guides, helping you feel confident so that you’re ready to manage whatever may come next.
After the substantial tax overhaul from the Tax Cuts and Jobs Act of 2018, Congress also updated retirement legislation. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20th, 2019. There are some important changes that may impact you and your financial plan.
The SECURE Act’s intent is to promote and push for retirement benefits to be available to more Americans. This bill features many positive provisions, like increasing the required minimum distribution (RMD) age, eliminating an age restriction for contributions to your Traditional IRA, and offering small businesses tax credits to incentivize them to offer a retirement plan. However, it seems that all these added benefits are being overshadowed by the elimination of the “stretch” IRA. The elimination of the “stretch” IRA is a challenge for many of our affluent clients’ financial plans and must be addressed. Statistically, however, most beneficiaries distribute their IRA, within two years of inheritance.
Listed below are a few of the key provisions that will affect the way we think about creating a financial plan. We feel the first three items are the most likely to impact clients:
1. Required Minimum Distributions (RMDs) Age Increase
The SECURE Act delays RMDs until age 72 versus the previous 70½. This will allow your retirement funds to grow another year and a half and also avoid the confusion of a half-year age start date. The change to the new required beginning date for RMD’s only applies to those individuals who turn 70½ in 2020 or later. Therefore, if you turn 70½ on December 29, 2019, then you will still be required to take an RMD under the existing rules.
2. “Stretch” IRA Eliminated
The SECURE Act eliminated the current rules that allow non-spouse IRA beneficiaries to “stretch” the inherited IRA over their own lifetime. This allowed beneficiaries to continue to grow the inherited IRA tax-free for decades. The new rule is effective in 2020 and forces non-spouse beneficiaries to distribute the whole IRA within 10 years of the IRA owner’s death. There will be no distribution requirements, but the account must be emptied by the 10th year after death. Any inherited IRA’s before 2020 will be grandfathered in to the prior tax code. This rule also applies to other inherited defined contribution plans (401(k), 403(b), 457(b)). However, 403(b) and 457(b) plans’ effective date is not until 2022. Some exceptions to the non-spouse rules include if the beneficiary is a minor, disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches age of majority – at which the 10-year rule starts. The elimination of the “stretch” is a great reason to revisit your estate plan.
3. No Age Restrictions on IRA Contributions
There is no longer an age restriction for when you can contribute to a Traditional IRA. Therefore, as long as you have earned income you can make a contribution to your Traditional IRA. This was the only retirement account that had this limitation. However, any post- 70½ Traditional IRA contributions will cumulatively reduce any future qualified charitable distribution (QCD) deduction.
4. Kiddie Tax Reverts Back to Parents’ Tax Rate
The Tax Cuts and Job Act adjusted unearned income from children to be taxed at the trust tax rate. However, the SECURE Act reverts the tax rate back to the child’s parents’ marginal tax rate. This is effective 2020, but the taxpayer can make an election to apply the parents’ marginal tax rate on their previous filed 2019 & 2018 tax returns.
5. 529 Plans Can Be Used to Repay Student Loans
Under the new law, tax-free 529 plan distributions can be used to pay for registered programs and up to $10,000 in student loan payments. Principal and interest payments toward a qualified education loan will be considered qualified 529 plan expenses. However, the interest paid for by the 529 plan cannot also be used for the student loan interest deduction. The law includes an aggregate lifetime limit of $10,000 in qualified student loan repayment per beneficiary. This will allow grandparents to help pay for their grandchild’s college without affecting FAFSA.
6. Increased Tax Credits for Small Businesses
Small businesses are eligible for up to a $5,000 tax credit to help offset start-up costs. There is an additional tax credit of $500 a year for three years if the plan offers automatic enrollment. Eligible employees will have to elect out of the plan if they do not want to participate.
7. Expansion of Multiple-Employer Plans
This act significantly reduces the barriers to establishing and maintaining multiple employer retirement plans (MEPs). Reducing the barriers will allow more unrelated small businesses to share in the administrative and financial burdens of establishing and maintaining a retirement plan by pooling employer plans together.
8. Plan eligibility for Part-Time Employees
Starting in 2021, the new retirement law allows 401(k) eligibility for employees who have worked at least 500 hours per year (prior law was 1,000 hours) for at least three consecutive years. The age requirement for eligibility is 21 by the end of the three-year period. The change does occur in 2021, but since there is a 3-year lookback period the earliest an employee could participate is 2024.
9. Penalty-Free Withdrawals for Birth or Adoption of Child
You can now take up to $5,000 penalty-free from your 401(k), IRA, or other retirement account to help pay for the birth or adoption of a baby. You will still have to pay income tax on the amount taken out, unless you repay the funds. You have one year from the date your child is born or the adoption is finalized to withdraw the funds to avoid the 10% early withdrawal penalty. If you recontribute the amount back into your retirement account at a later date this amount counts as a rollover and will not affect your annual contribution limit.
10. Annuities and Lifetime Income Options in Retirement Plans
The SECURE Act requires 401(k) plan administrators to provide annual lifetime income disclosure statements to plan participants. These statements will break out what your estimated monthly payment would be each month if your total 401(k) account balance was used to purchase an annuity. The SECURE Act also includes several provisions to encourage employers to offer annuities in their retirement plans.
At Krilogy, we are committed to staying abreast of all industry developments and how they might impact our clients. Please let your advisor know of any questions you may have about this new law and your specific financial plan.