How the SECURE Act Will Impact YouSubmitted by Korhorn Financial Group, Inc. on February 21st, 2020
The SECURE Act will change your financial plan and some of the financial decisions you make. I’ll tell you how coming up.
Big, big changes signed into law on December 20, 2019, and it will impact your financial life. Maybe you’ve heard of it, maybe you haven’t because it's really been flying under the radar, but it’s called the SECURE Act, and it stands for Setting Every Community Up For Retirement Enhancement. Does it live up to that? That’s debatable, and I’ll tell you whether it does or not as I share the top seven ways this thing is going to impact your financial life.
First, the biggest change, in my opinion, is the age when you must begin drawing money out of your pre-tax retirement accounts. This is called your Required Minimum Distribution, or RMD. It used to be once you turned 70 ½ you’re forced to take money out of your pre-tax accounts like IRA’s. Why 70 ½, I have no idea, I always hated that date. Well, the good news is they moved this age back to 72. Not a big change, but that can be some serious tax savings…thousands of dollars in tax, so I’m in favor. This change takes effect now for anyone who was not yet age 70 ½ as of 12/31/19.
The second biggest change in the SECURE ACT, and this one I am not a fan of, is that it gets rid of something called the Stretch IRA strategy. When you inherit a pre-tax retirement account from someone, you could withdraw all of the money out immediately and pay a lot of tax, or you could pull out just a minimum amount each year for the rest of your life. By “stretching” your withdrawals out of this inherited account over your entire life, you allowed this money to continue growing tax-deferred, again saving you lots of tax. Well, unless you’re inheriting an account from your spouse, or you qualify for just a handful of other exceptions, the days of stretching your withdrawals from an inherited IRA are gone.
With the SECURE Act, instead of stretching your withdrawal out over your lifetime, the account now needs to be emptied within 10 years. This means you’re being forced to pull the money out over a shorter period of time, which likely means more tax, and for that reason, I’m not a fan.
This part of the SECURE Act, in particular, has huge tax planning considerations for you, and you may need to rethink your estate strategy and even possibly using the Roth IRA even more.
The third big change in the SECURE Act is removing the age limit on contributing to IRA’s. It used to be that if you or your spouse turned age 70 ½ and had enough earned income, you could contribute to a Roth IRA, a SIMPLE IRA if you had one through work, maybe a 401(k) if that was available, but you couldn’t contribute to a Traditional IRA! It was like age discrimination for funding an IRA. Thankfully, with the passing of the SECURE Act, there is no longer an age limit on funding an IRA. You still have to have earned income though, so unless you or your spouse are working past age 70 ½, this may not impact you.
There’s one more change with IRA’s in the SECURE Act and it’s related to Qualified Charitable Distributions. This is very technical so I’ll just mention that Qualified Charitable Distributions are still intact after the new law, and they still allow you to do these once you reach age 70 ½. So even though they moved the RMD age to 72, this age stays the same at 70 ½…but any IRA contributions you make after you turn age 70 ½ will count against the benefit of the Qualified Charitable Distributions. Again, super confusing, but this is ultimately still good news, with one limitation, so be sure you work with your Certified Financial Planner™ to see how this may impact you.
Alright, that’s it with the IRA changes under the new law, but the SECURE Act brought a big change to 529 plans and how they work with student loans. You can now withdraw up to $10k a lifetime from your 529 plan to pay down student loans. At first glance you may say that’s not that helpful; if you had the money sitting in a 529 account you wouldn’t have the need to use student loans. There’s actually more application here then you might think. For one, in states where there is a tax incentive to fund a 529 plan, if you are done with school but still have loans, you should consider funding your 529 plan to capture that state tax benefit and then use that money to pay down your loans. On top of that, this also opens up more ability for parents and grandparents to gift and help kids get out from under their student loans…not to mention that this new rule just makes sense: if 529 plans are for paying for college, it just logical that they could be used to pay down student loans, so I’m in favor of this change.
Will this change influence the State of Indiana to change its very beneficial tax incentive on funding the Indiana 529 plan? It’s possible in my opinion, so take advantage of this while you can and watch out for future legislative changes from states like Indiana.
The 6th big change in the SECURE Act is that you’re now able to use your retirement account to help cover some of the costs of having a child or adopting. The limit is $5k per person that you’re able to draw out of your retirement account within a year after the child is born or adopted. Keep in mind that this withdrawal is still taxable…this is not a tax-free strategy…it just means you get to avoid the 10% penalty if you take this money out to help cover the cost of having a child or adopting. Be careful when doing this though…even though you can now do this, it doesn’t mean you should; I would see this as a last resort so that you keep as much precious money set aside for retirement as possible.
And finally, what the SECURE Act was actually all about, is making some changes to your 401(k) or retirement plan at work. I’m not going to hit all of the changes, but the big one is the new law encourages companies to use annuities as part of their 401(k) plan. Since annuities can be easily turned into a lifelong income stream, like a pension, this bill is trying to encourage companies to use more annuities. Personally, I think this part of the Act is not very helpful…since anyone can use an annuity in retirement if they want, so I’m not really seeing the benefit here.
Other changes in the law that you might see in your 401(k) is allowing more part-time workers to become eligible to contribute to the 401(k), which is great, and also encouraging small businesses to open retirement plans like Multi-Employer Plans or MEPS, love that too. Finally, the new law also allows employers to have auto-enrolment contributions in their 401(k) to go up to 15% instead of the previous 10% cap, and I’m in favor of this one as well.
There you have it, the highlights of how the new SECURE act will influence your financial life and financial plan. You already know that a new law itself isn’t going to set you up for retirement, as the name may imply…it's you taking the right steps to prepare that will get you there. Likely there are parts of this law that mean you need to make some changes to your finances today, so be sure you reach out to your Certified Financial Planner or talk to them in your next appointment, to apply this to your specific financial life.
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Alright, until next time, I’m Mike Bernard, go out and take your next wise step in your financial life.