5 Ways the SECURE Act Could Change Your Finances

By: Scott Fischer, Senior Investment Consultant

As we enter the year 2020, we also enter a time with new federal rules affecting wealth management. The SECURE Act, or Setting Every Community Up for Retirement Enhancement Act, is the most significant retirement-related legislation in over a decade and will impact the way you plan on managing your money. Below is an overview of some of the key changes taking effect this year:

1. Required minimum distribution starting age has been increased from age 70½ to age 72

To provide additional time for retirees to grow their retirement accounts, savers can wait until age 72 to take required minimum distributions. The required minimum distribution starting age has been increased from age 70½ to age 72 for individuals who were born on or after July 1, 1949. For those who turned 70 ½ in 2019, you will not be able to take advantage of the new law and will still need to take required distributions on the previous timeline.

2. Contribute to a traditional IRA past the age of 70 ½

Contributions to traditional IRAs by those aged 70½ or older are now permitted if employment income is still coming in. (Contributions to Roth IRAs post age 70½ have always been permitted and will continue to be so.) Keep in mind, post-age 70½ contributions to traditional IRAs may affect an individual’s ability to make Qualified Charitable Distributions. Starting at age 70½, individuals can annually make up to $100,000 of QCDs, which allow IRA funds to be used for certain charitable contributions on a pre-tax basis. However, the act does add language that prevents an individual from distributing as QCDs any deductible contributions made to traditional IRAs for the year that the individual reaches age 70½ and for years thereafter.

3. New 10-year rule for stretch IRAs

The “Stretch IRA” is eliminated for most beneficiaries of individual retirement accounts whose owners pass away in 2020 or later. The stretch IRA previously allowed younger, non-spouse beneficiaries to take minimal annual distributions from inherited IRAs over their life expectancies. Under the new law, the entire balance of the inherited IRA must be withdrawn within 10 years.  There are no required minimum distributions each year under the new law, but the entire balance must be distributed by the end of the 10th year. Exceptions to this new 10-year rule include spouses, those disabled and chronically ill, those who are not more than 10 years younger than the deceased IRA owner, and minor children until they reach the age of majority. Trusts will also follow the same 10-year rule, likely being designed in accordance with the old lifetime stretch provisions.

4. Make penalty-free withdrawals to help with the birth or adoption of a child

New parents adopting a child can withdraw up to $5,000 ($10,000 per couple) in penalty-free withdrawals from retirement accounts within one year after adopting or giving birth to a child. That means a couple can withdraw $10,000 per child. The withdrawal must be made during the one-year period following the birth or finalized adoption date of a child. The withdrawals are included in taxable income. The amount may be repaid later as an additional contribution to a parent’s retirement account, which can be over and above an individual’s standard contribution limits.

5. Be aware of expanded eligible expenses for 529 accounts

To provide some relief for individuals burdened with student loan debt, 529 Education Plan eligible expenses now include a lifetime limit amount of $10,000 that can be used to pay off the student loans of the beneficiary, along with an additional $10,000 for each sibling of the beneficiary. Eligible expenses have also been expanded to include the educational costs of trade schools and apprenticeships of the beneficiary. The act makes these changes retroactive to distributions made after December 31st, 2018.

Paying attention to the above changes that the SECURE Act has made is one way to keep your finances in check this year. If you have any questions, please contact Scott Fischer, our Senior Investment Consultant, at sfischer@enzafinancial.com or by phone at (216) 393-1852.

This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider. 

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