On Dec. 20, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (Secure Act). The new law is intended to increase opportunities for individuals to grow their retirement savings.
Required minimum distributions (RMDs) now begin at age 72
Prior to the SECURE Act, if you had money in a traditional Individual Retirement Account (IRA) or an employer-sponsored retirement plan and were retired, you were required by law to start making withdrawals at age 70 ½. But individuals who haven’t hit 70 ½ by the end of 2019, the SECURE Act will push out the RMD start date for most people until age 72.
Bad News for Stretch Provisions on IRAs
The SECURE Act removed what was called “stretch” provisions for beneficiaries of IRAs and defined contribution plans, like 401(k)s.
Prior to the SECURE Act, if a traditional IRA was left to a beneficiary, that individual was allowed in most cases to stretch out the RMDs over his or her own life expectancy. With the SECURE Act starting on Jan. 1, 2020, most IRA beneficiaries will now have to distribute their entire inherited retirement account within 10 years of the year of death of the owner.
Surviving spouses and minor children are generally exempt from this new SECURE Act 10 year distribution rule.
The SECURE Act should prompt you to review the beneficiary designations of your retirement accounts to make sure your goals are still aligned.
Expanded Tax-Free Section 529 Plan Distributions
Distributions from your child’s Section 529 college savings plan are non-taxable if the amounts distributed are:
– Investments into the plan.
– Used for qualified higher-education expenses such as books, supplies, and equipment required for the designated beneficiary’s participation in the registered program.
If you rely on the student loan provision to make tax-free Section 529 plan distributions there is a $10,000 maximum per individual loan holder, and the loan holder reduces his or her student loan interest deduction by the distributions, but not below $0.
No Longer an Age Limit on Traditional IRA Contributions
Prior to the SECURE Act, you were prohibited from contributing funds to a traditional IRA if you were age 70½ or older.
Now you can make a traditional IRA contribution at any age, just as you could and still can with a Roth IRA. This applies to contributions made for tax years beginning after December 31, 2019.
Automatic Contribution Tax Credit for Small Employers
If your business has a 401(k) plan or a SIMPLE (Savings Incentive Match Plan for Employees) plan covering 100 or fewer employees, and it implements an automatic contribution for employees, either you or it qualifies for a $500 tax credit each year for three years, beginning with the first year of such automatic contribution. This change is effective for tax years beginning after December 31, 2019, and this credit applies to new and existing retirement plans.
Guaranteed Lifetime Income
The SECURE Act encourages employers with retirement savings plans to let employees convert their savings into guaranteed lifetime income, through annuities. The SECURE Act protects employers from being sued if the insurer they choose to make annuity payments doesn’t pay claims in the future.
The SECURE Act is mainly intended to expand opportunities for individuals to increase their retirement savings. Secure Investors Group encourages you to meet with a professional to see how these new laws impact your current retirement plan along with your estate plan. Changes in the tax law, family relationships, and your own financial circumstances are common reasons to review and require that you update your planning strategies every few years.
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