by: Darren Brennan, CFP®, CRPC®
As you may already know, the SECURE Act was passed on December 19, 2019. This new law will have a huge impact on retiree’s, beneficiaries, new parents, and many others. Let’s take a closer look at the SECURE Act and how it may impact your financial and retirement plans.
Required Minimum Distribution Relief
Before the SECURE Act, if you were retired and had money in a traditional IRA or 401(k), you were subject to required minimum distributions (RMD) at age 70 1/2. Now the new law states if you haven’t hit age 70 ½ by the end of 2019 your RMD start is pushed back to the year in which you turn age 72. This will have an impact on the following strategies/scenarios:
- Roth Conversions:
The new law gives two additional years to do Roth conversions without having to worry about the impact of required minimum distributions. Once RMDs begin, it generally becomes harder to do Roth conversions and remain in a lower tax bracket.
- Working into your 70’s:
If you’re still working into your 70’s and are looking for a potential tax break, you can now contribute to a Traditional IRA until age 72.
- Extended Growth Potential:
If you don’t need to withdraw money from your traditional IRA or 401(k) to cover lifestyle expenses, the funds can remain in the account for a few more years to enjoy tax-deferred growth.
Elimination of Stretch IRAs
Before the SECURE Act was passed, if you inherited an IRA or 401(k) you could “stretch” your distributions out over your life expectancy. Thus, resulting in continued growth and minimal taxes being paid. Now, if the retirement account owner passes away on or after January 1, 2020 the non-spouse beneficiaries will be required to deplete the entire account within 10 years, causing many taxpayers to be pushed into higher tax brackets. This could be problematic for some beneficiaries, especially for those in their 40s and 50s which typically is the peak of their earning years.
- Exceptions to the 10-year rule:
Assets left to a surviving spouse, minor child, disabled or chronically ill beneficiary. This is a huge change and will require many to reevaluate estate planning strategies. Please note: If you’re a beneficiary of an IRA or 401(k) and the original owner passed away before January 1, 2020, you do not need to make any changes.
Pay Down Student Debt with 529 Plan
Do you have a remaining balance in your 529 plan? The SECURE Act also allows federal-income-tax-free 529 distributions to cover up to $10,000 of qualified student loan principal and/or interest payments.
Here’s the bottom line: The SECURE Act has made many new important tax changes. We only touched on a few of the key changes in this post. If you have questions on how the new SECURE Act will affect your personal situation, please reach out to our office for help.