The “Setting Every Community Up for Retirement Enhancement or “SECURE Act” as it is known, was a bill recently passed by Congress as part of the massive $1.4 trillion spending bill. While the budget is focused on spending, much of the SECURE Act is focused on savings with substantial implications for pre-retirees, retirees and small businesses. It is one of the most massive retirement savings regulations to pass Congress. New rules for inherited accounts and small business retirement plans, it will be crucial for retirees to understand how that will impact them.
According to NJ Times, the new law will increase the age retirees must take distributions from their retirement accounts from 70-and-a-half to 72. Note, this new RMD rule will only apply to individuals who turn 70-and-a-half after Dec. 31, 2019. For example, if a retiree turned 70-and-a-half in 2019, they would still have to take distributions beginning in 2019 and the new law would not apply. Under those new rules, individuals that inherit an IRA can choose to distribute these assets slowly over their lifetime. The SECURE Act will now require that inherited IRAs be distributed within 10 years.
This strategy is called the “Stretch IRA” because beneficiaries keep the bulk of their inherited IRAs growing tax deferred while they stretch distributions over their lifetime. While there are quite a few exceptions that apply to spouses, disabled individuals, minor children and beneficiaries that are less than 10 years younger than the decedent, this change may create significant estate and tax planning implications for other types of beneficiaries. According to Sky Statements, new rules will allow parents to make penalty-free withdrawals of up to $5,000 from their retirement account for expenses associated with birth or adoption. That will apply after the first year of birth and adoption. Income tax will still have to be paid on pre-tax contributions that are withdrawn, no penalties will apply to the withdrawal, potentially saving parents 10%.
It will allow for up to $10,000 of distributions from 529 plans to be applied to student loans. Instead of an annual limit, $10,000 is the lifetime limit for each 529 plan beneficiary. Keep in mind, the portion of student loan interest that is paid for with tax-free 529 earnings is not going to be eligible for the student loan interest deduction. Distributions from grandparent-owned 529 plan are considered untaxed student income on the Free Application for Federal Student Aid (FAFSA) and can reduce a student’s financial aid package by up to 50% of the value of the distribution. Last but not least, the SECURE Act also makes it possible for 401(k) plans to offer annuities as part of their investment options. While this is not a requirement, it simply eliminates the regulatory barrier that previously existed. The SECURE Act creates many planning opportunities for individuals, families and businesses and it is important to understand how these new rules may impact the financial life of the recipient.