You may have recently read that the SECURE Act was signed into law on December 20, 2019. So, what does that mean for you? It could have more of an impact than its name alludes to since it’s 29 original provisions address many topics from inherited IRA distributions to the age for required minimum distributions. Here are some key points to take into consideration.
1. Required Minimum Distribution Age Changed to 72
The first major impact of the Setting Every Community Up for Retirement Enhancement (SECURE) Act is the extension of the required minimum distribution (RMD) age to 72. For those of you who are already taking RMDs there is no change, so it’s business as usual. The change only impacts Americans who are not yet age 70 ½ or are close. Here’s where it gets confusing. If you are age 70 ½ prior to December 31, 2019 then you still have to take RMD’s in 2020. If you turn age 70 ½ after December 31, 2019 then your required distributions won’t begin until the year you turn 72. However, your RMD’s will be slightly more than under the old rules.
2. Changes to Rules for Inherited IRA Distributions
The second provision that can affect a vast number of Americans is what is known as the stretch IRA. No, this isn’t a trendy new workout, but rather a change to the rules for inherited IRA’s. Whereas the rules used to allow for a non-spousal inherited IRA to be distributed over the beneficiary’s lifetime, now they have limited that timeframe to 10 years. No big deal, right? It could be.
For example, you’re in your mid 50’s and at the peak of your income years which is reflected in your tax bill each year. Retirement is just around the corner and you’re pretty well prepared for that next phase of your life. Then you learn your great aunt Edna has passed away and has left you her hard-earned money because she has no children of her own. And it’s substantial. Unfortunately, since Edna passed away as a wealthy woman you now have to distribute her 6-figure IRA to yourself within the next 10 years. A $500,000 IRA balance distributed over a 10-year period equates to $50,000 of earned income each year for 10 years. That’s a big chunk of money that is added to your already earned income because you are still working. This could result in a very large tax bill for 10 years!
Rest assured, there are planning opportunities here that your financial advisor can assist with minimizing your tax bill.
3. Using 529 Plan Funds for Student Loan Payments
The last provision that we think worth mentioning is that now 529 plan funds can be used to pay on student loan debt – up to $10,000 in the lifetime of the beneficiary. Many times, a 529 beneficiary will need funds for expenses that do not qualify for a tax-free distribution from their account. Or taking distributions from the 529 plan can negate preferential tax treatment or scholarship opportunities. If student loan debt is chosen, this doesn’t have to burden the student while they establish their life after college graduation. Instead, funds can be taken from the 529 plan to service the debt, establish credit for the beneficiary, and not prolong repayment as they enter the workforce.
If you have specific questions about these or any of the other provisions not mentioned in this article, we’d love to talk with you, so please feel free to give us a call.