As you start the new year, you may have an opportunity to boost your retirement savings thanks to sweeping changes in the SECURE Act bill that was passed and signed into law in December 2019.
This bill changes the rules your tax-advantaged accounts must follow for funding, distributions and the way they are administered. It also helps part-time workers save for retirement, small-business owners to band together to create a retirement plan, parents to fund more of their children’s education with a 529 plan and parents adopting or having a child to cover some of those expenses without penalty.
Here are some of the highlights of the SECURE Act.
• 72 is the new 70 1/2 for IRAs - You will now have until age 72 to take your first required minimum distribution (RMD) from an IRA. Previously, it was age 70 1/2. You can also continue contributing to your IRA even after you turn 72 if you have earned income. This is a major win for retirees, because it allows tax-deferred earnings to continue growing over time before having to withdraw a minimum amount each year.
• Death of the Stretch - Prior to the bill, if you had an IRA and left it entirely to your children, those children could “stretch” distributions out over their lifetimes. With the new rules, those children will have to take distributions for the full balance of the IRA over 10 years. Compressing that time frame means larger distributions, which will likely result in a larger tax liability during what may be some of an IRA beneficiary’s prime earnings years when he or she may be in higher tax brackets. Also, if you have established trusts as your beneficiary, check with your advisor to see how that impacts your beneficiaries. Some trusts may force all the distributions out in the 10th year, which could be contradictory to your original estate planning goals.
• Penalty-Free Distributions for Children — The SECURE Act allows parents to withdraw up to $5,000 from an IRA or 401(k) to pay for adoption or childbirth expenses without penalty, but taxes will be due on the amount distributed. The benefit here is, if you don’t have access to other sources of funds, your retirement accounts are now an option. The downside is that, while it’s good to have options, there may be better ways to fund these kinds of expenses, since distributions from your 401(k) may hinder the growth of your retirement account in the long run.
• Small-Business Owners — Now small-business owners, regardless of the industry they work in, can band together to create what’s called a Pooled Employer Plan (PEP). If you are a small professional practice, restaurant, or family-owned business, it is now easier to establish a retirement plan. Under the SECURE Act, small businesses can get together and create a PEP, which allows them to share costs, investment lineup, and any annual administrative duties involved in maintaining the plan. Small businesses will also receive a tax credit for implementing automatic enrollment.
• Part-Time Work, Full-Time Retirement Account — Prior to the SECURE Act, part-time employees could be excluded from employer retirement plans, but now individuals who have worked with a company at least three years and at least 500 hours per year or 1,000 hours in the past year can enroll in their employer plan.
• Additional Options in your 401(k) — One of the goals of the SECURE Act was to address the increasing problem of individuals retiring and not having adequate savings or being unsure about how to invest their retirement proceeds to adequately meet their cash-flow needs in retirement. To address that challenge, retirees may now more easily purchase an annuity within their retirement plan to help ensure they have a steady stream of income throughout retirement.
• 529 Plans Improved — The passage of the Tax Cuts and Jobs Act (TCJA) of 2017 expanded the role of 529 plans so families could use them for educational expenses prior to college. The SECURE Act continues that trend by allowing individuals to use 529 plan funds to pay off up to $10,000 of student loans per year. The state of Colorado has not yet adopted these provisions, so check with your plan provider to see if your 529 plan allows for education prior to post-secondary schooling or for student loans.
Patricia Kummer has been a Certified Financial Planner and a fiduciary for over 30 years and is Managing Director for Mariner, LLC d/b/a Mariner Wealth Advisors, an SEC Registered Investment Adviser. Please visit www.marinerwealthadvisors.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Suite 500, Overland Park, KS 66211.
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