At the end of 2019, The SECURE Act was passed by the Senate and signed into law by President Trump.
The ‘Setting Every Community Up for Retirement Enhancement’ (SECURE) Act was created to help improve retirement security by making saving for retirement easier and more accessible to many Americans. The law also helps increase access to tax-advantaged accounts and attempts to prevent older Americans from outliving their assets.
Why change?
The retirement system in the U.S. has not seen any big changes since 2006. According to data from the U.S. Bureau of Labor Statistics published in 2018, only 55% of the adult population participate in a workplace retirement plan and most are often behind when it comes to investing part of their paycheck.
In 2019, Vanguard stated that the median 401(k) balance for those 65 and older is $58,035. That’s quite a shocking number.
U.S. Representative Richard Neal, chairman of the Ways and Means Committee exclaims, “With [the] passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures.”
What are the key changes and how do they affect your situation?
Stretch IRA’s
The SECURE Act eliminates the Stretch IRA provision, which allowed an inherited IRA account to be distributed over a lifetime. Under the new law, retirement account owners who pass away after January 1, 2020, beneficiaries are required to withdraw assets in an inherited IRA or 401(k) within 10 years. There are some exceptions including a surviving spouse, minor children, disabled and chronically ill beneficiaries and beneficiaries who are up to 10 years younger than the IRA owner.
Ages Limits
The SECURE Act changed the Required Minimum Distribution (RMD) and the IRA contribution ages. RMD’s are now required to begin in the year an individual turns 72 years old. Before the Act, workers with an individual retirement account used to only be able to contribute up until age 70 ½. Individuals who have already begun taking their RMD are to stay on their current schedule.
The act also eliminates the IRA contribution age limit and allows any individual, no matter the age, to contribute to an IRA as long as they have earned income.
Student Loans
The SECURE Act expanded the ‘Qualified Higher Education Expenses’ to include Education Loan Repayment. Individuals can now use $10,000; in their lifetime, from a 529 account to pay off student loans for the 529 account’s beneficiary.
Other changes include:
- Qualified Charitable Distributions (QCD) are still allowed starting at age 70 1/2
- Creates a tax credit for small businesses establishing a 401(k) (or a 403(b), SEP IRA or SIMPLE IRA)
- Creates a tax credit for the adoption of auto-enrollment of participants in 401(k) plans
- Allowance of qualified Disaster Distributions up to $100,000 per disaster, from retirement accounts
- Allowance of mortgage insurance premium deduction
- Deduction for qualified tuition and related expenses
- AGI “hurdle rate” for deducting qualified medical expenses remain at 7.5%
- Miscellaneous incentives for economic growth, energy production and green incentives
Meet with your advisor
If you could inherit a 401(k), IRA or other retirement accounts from anyone other than your spouse, you are likely going to be affected by the SECURE Act. You may need to adjust how much you withdraw annually as compared to the previous rules. This is expected to increase the number of taxable distributions and result in higher tax revenue for the government.
Those doing estate and retirement planning need to understand the tax impact of leaving your IRAs and 401(k)s to your beneficiaries as the rules will significantly affect them.
Verdant Wealth is prepared to educate and assist you in navigating your financial future. Schedule a consultation today.
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Verdant Wealth Management is a d/b/a of Nelson, Van Denburg & Campbell Wealth Management Group, LLC, a registered investment advisor. Financial Planning and Investment Management Services are offered through Nelson, Van Denburg & Campbell Wealth Management Group. LLC.