As was mentioned in our previous blog, the Secure Act has made some sweeping changes to the world of retirement planning. We’ve already covered how it effectively ends “Stretch IRAs,” and now we’d like to cover a few more parts.
One piece of good news is that the age restriction limiting people from contributing to traditional IRAs after age 70 ½ has been repealed. Contributions to Roth IRAs by qualifying taxpayers were already allowed. This is a windfall, particularly to people working later in life, as they may continue to make potentially tax-deductible contributions, letting them grow tax-deferred, until withdrawal. If an investor has earned income, they are allowed to contribute to their IRA. This provides more flexibility in planning to better optimize their after-tax returns and retirement income.
Another piece of favorable information is that the age at which an investor is required to take Required Minimum Distributions (RMDs) has been pushed back by a year and a half, to age 72. This is only for those who turn 70 ½ after 2019. Those who reached 70½ before the new year are still required to begin taking required distributions by April 1st of the year following the year they reach age 70 ½. This change recognizes the fact that people are working and living longer, allowing them to hold onto their money for a little while longer before being required to distribute it and pay taxes.
The SECURE Act also removes the penalties for early withdrawals in circumstances surrounding qualified birth or adoption distributions. Previously, if someone took a distribution from a qualified retirement plan before they reached age 59 ½ for these purposes, they would be forced to pay a 10% early distribution penalty on the taxable portion of the distribution. With the new Act, people may take one distribution during the year after the account owner’s child is born or legally adopted without incurring a penalty. The distribution limit is $5,000 per person, meaning a person and their spouse could distribute a combined $10,000 without owning an early distribution penalty. Qualified exceptions apply for other purposes as well. If you need to take money from your IRA before 59 ½, please contact your advisor.
The Secure Act also retroactively reinstated the Kiddie Tax, which was amended in 2017 by the Tax Cuts and Jobs Act (TCJA). The Kiddie tax was originally implemented in 1986 to make it difficult for parents to use their children as tax shelters. The TCJA changed the rate at which children’s unearned income was taxed, going from the parents’ rate (if it was higher than the child’s) to the extremely compressed tax rates paid by trusts and estates. This concerned legislators who feared this may negatively affect survivors of deceased military personnel, first responders, and emergency medical workers, who may fall under the new punitive tax rules. So, the new law was vacated, and the pre-TCJA rates were reinstated.
529 plans were further expanded to allow for federal-income-tax-free distributions for eligible apprenticeship costs, and up to $10,000 of qualified student loan payments. The Act requires 401(k) plan administrators to provide an annual “lifetime income disclosure statement” to plan participants to see how much money they could be paid each month if their 401(k) account balance was used to purchase an annuity. The SECURE Act will also make it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options to plan participants by taking away some of the associated legal risks. They would be portable, too. These may seem alluring, with their promises of “guaranteed lifetime income,” but buyer beware. Annuities may come with significantly high fees; then, there are “surrender charges,” where cancellation of the annuity can result in you losing 7% of the value of the annuity. Although there are certain circumstances where annuities may be a good fit, they should only be purchased after considering all other viable income options, such as making the appropriate Social Security claiming decisions, and investing in companies that grow their dividends.
If you have any questions about how the SECURE Act affects your Wealth Plan, please contact an HCM Wealth Advisor today.
About the Author: Mike Hengehold
Mike Hengehold is Founder and CEO of HCM Wealth Advisors. Mike holds the Personal Financial Planning Specialist designation from the American Institute of Certified Public Accountants and has more than 30 years of investment, tax and financial planning experience.