New Tax Law Makes it Easier to Save for Retirement
Did you know that nearly one-fourth of working Americans have no retirement savings at all? And that includes 13% of workers age 60 and older. Wow!
Given the fact that pensions are very rare now (if you have one, you are so lucky!), the responsibility for future life planning has fallen on American workers’ shoulders. The primary sources of retirement planning now are Individual Retirement Accounts (IRAs) and employer-provided plans such as 401(k)s. Now there is a tremendous work-around to assist in planning your future. On December 20, 2019, a new tax law went into effect: the Setting Every Community Up for Retirement Enhancement (SECURE) Act was created to give working Americans additional time and resources to up their retirement planning game.
There are many changes, but here are some top items you need to know about.
Required Minimum Distribution (RMD) Rules
For retirement accounts funded with pre-tax contributions, the IRS says that at age 70½ you must begin taking distributions—whether you want or need the funds or not. Why? Because you never paid taxes on that money, and now they say it’s time to pay. Under the SECURE Act, you now can begin taking distributions 18 months later, at age 72. This rule applies to anyone who turns 70½ after 2019. If you turned 70½ prior to or during 2019, you are “grandfathered” in under the old rule and must continue to take your RMD. The first year you turn 70½, you have the option to defer taking your first RMD until April 1st of the following year. If you turned 70½ in 2019, and you elected to defer taking your RMD by April 1st of this year, just know that you are required to take two distributions in 2020: one for 2019 and one for 2020. The 2020 distribution will need to be distributed by December 31st.
Inherited IRA Rules
Stretch rules for inherited IRAs are done. In the past, non-spouses had different options for how and when to take funds from an inherited IRA, which could extend out as far as their lifetime. The rules have changed, and now there is a maximum timeline of 10 years. All funds in an inherited IRA must be removed by then. Of course, the funds are subject to taxes, but there will be no tax penalty if you are younger than 59½.
Since 1980, the percentage of Americans working into their 70s has increased from less than 10% to nearly 15%—and the numbers are increasing. Some are working because they need to and others because they want to still be active and engaged. Now that the RMD has moved to age 72, that opens the door for additional contributions to traditional IRA accounts. No matter what your age is, and as long as you have earned income, you can continue to contribute to your IRA. As long as your contribution doesn't exceed your compensation, you're good to go. Just remember though: you must still take your RMD from your retirement accounts. So you can add—but you must still withdraw funds to meet your RMD. Working with a planner can help to make sure you're on board with these new rules.
Birth and Adoption Rules
Planning to expand your family? Up to $5,000 per parent can now be withdrawn from your retirement accounts to support this. Taxes are still payable, but there is no 10% penalty on the withdrawal, as in the past.
529 Plan Rules
Good news for a lot of students: withdrawals can be made now from 529 accounts to repay up to $10,000 in student loan debt.
Several updates have been added to enhance retirement plan options for business owners. The new legislation now allows for business owners to set up qualified retirement plans up to the due date of their tax return, including extensions. Previous rules mandated that qualified retirement plans had to be set up before end of the tax year, although they could be funded up to the tax filing date, including extensions. In addition, Multiple Employer Plans (MEPs) are a platform that can provide small businesses access to a pool of retirement plans, making it easier for the businesses to offer benefits to their employees. Finally, the SECURE Act has increased the tax credit for expenses related to starting a new employee plan, from $500 annually to $5,000 for the first three years.
Just like the Tax Cuts and Job Act a couple of years ago, it will take a while to engross the impact of all the changes. Over the next few months, you’ll hear more about strategies and ideas about ways to maximize the benefits to you of the tax law changes.
Michelle Cheng & Dan Kopf (June 2019). The number of Americans working in their 70s is skyrocketing. Quartz At Work. Data from Integrated Public Use Microdata Series—Current Population Survey (IPUMS-CPS).
Image from DepositPhotos.