President Trump signed The Setting Every Community Up For Retirement Enhancement Act of 2019 (The SECURE Act) into law on December 20th, 2019. The thirty-one sections of legislation came at long last through bipartisan efforts throughout 2019, and they include some key changes to decisions, rules, and elections relating to how pre-tax accounts play into retirement income and other financial planning.
Sec. 107: No age cap for traditional IRA contributions.
Until this legislation was passed, contributing to a traditional IRA was limited to those younger than 70.5. More and more commonly, retirees are choosing to work part-time despite having retired from their careers. This new legislation will permit workers older than 70.5 to contribute (and deduct) up to $7,000 to an IRA in 2020. This amendment will be effective for contributions to such plans after December 31st, 2019.
“With longer life-expectancies and a change in demographics, many American workers are not ready for retirement at age 70.5. This change allows those employees to continue to contribute to their IRA’s for longer rather to strengthen their retirement plans.”
Sec. 113: Penalty-free withdrawals from retirement plans for individuals in case of birth of child or adoption.
In general, the IRS allows withdrawals from retirement plans without penalty once the account holder attains 59 ½ in age. Certain exceptions can be made in order to access these funds before reaching 59 ½ including experiencing financial hardship, an indirect rollover, or a 60-month loan from a qualified retirement account. The SECURE Act expands access to retirement plan funds for new parents by allowing $5,000 of withdrawals for each parent of a newly born or adopted child. This withdrawal is taxable, but it is not subject to penalties. The amount distributed under this rule may be repaid by the new parent, but it is not required. The amendments made by this section shall apply to distributions made after December 31, 2019.
“Many younger employees are reticent to contribute to their 401k plan when they have plans to become parents in the future, for fear they will need those funds to pay for additional expenses, including loss of income due to reduced working schedules. This change will provide an opportunity to contribute today, knowing they have access to those funds in the future with a new child.”
Sec. 114: Required Mandatory Distributions will begin at age 72 rather than 70 1/2.
Required minimum distributions (RMD) are withdrawals that need to be taken from a pre-tax retirement account (IRAs, 401(k), 403(b), etc.) at a specific retirement age. They are calculated each year based on a multiple from an IRS table, and the multiple is based on the account’s prior-year balance and age. Until recently, pre-tax retirement account holders needed to begin their RMDs beginning in the year they turned 70.5. The SECURE Act postpones RMDs until age 72 for those who haven’t began their RMDs. The amendments made by this section shall apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after December 31, 2019.
“ This change allows retirement funds to remain invested another 18 months with the potential of further gains, rather than depleting those funds early and experiencing the loss from taxes during that time.”
Sec. 302. Items to be expensed are expanded under 529 plans.
The SECURE Act amends Section 529(c) of the Internal Revenue Code of 1986 by expanding the scope of educational expenses eligible to be paid for by funds from a 529 account. In addition to the already included expense items, now funds from a 529 account may be used for fees, books, supplies, and equipment required for registered and certified apprenticeships. Additionally, this amendment allows applying 529 distributions to a qualified education loan repayment. The lifetime cap for this element of the amendment is $10,000, and the amendments made by this section shall apply to distributions made after December 31, 2018.
Sec. 401: Stretch IRAs limited to 10 years.
When loved ones pass, they often may leave behind assets in a pre-tax retirement account. If a surviving spouse is listed as the beneficiary on such an account, he or she is still covered by the old rules. A non-spousal beneficiary calls for different treatment and disbursement of the assets, and old rules factored in the life expectancy of the beneficiary in its RMD calculations, allowing for possible decades of income tax free or tax-deferred compounding after the original holder’s death (called a Stretch IRA). However, The SECURE Act now requires all funds to be taken from an inherited, pre-tax retirement account within ten years of the original holder’s date of death. There are exceptions to this rule and we are prepared to answer your questions.
In light of this changing landscape, pursuing your financial goals requires understanding the market as laws and regulations change. Olson Wealth Group has been closely monitoring this legislation since the bill came to public attention. We look forward to working with you regarding your personal retirement goals and taking advantage of these new opportunities. We appreciate your partnership and your trust and confidence and are committed to serving you with clarity of information and the wisdom applied to new planning techniques.
Andy Kuhl is Director of Wealth Services at Olson Wealth Group.
Olson Wealth Group is a full service wealth management firm. With wise counsel and clear strategies, our experienced specialists provide tailored approaches that strive to maximize wealth. For more information, please visit OlsonWealthGroup.com
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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such a state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.