If you want a job that never stays the same, become a financial advisor! New laws like the SECURE (Setting Every Community Up for Retirement Enhancement) Act keep us forever on our toes, and I love it!
2020 introduced more than just a new decade – it introduced sweeping new rules regarding retirement savings. What you may not realize is that these new rules could easily impact YOU! I’m sharing information that you, an everyday investor, must be aware of.
1. Good news for those planning for a child!
How it used to be
Most distributions made from an IRA before you turned age 59 ½ were both taxed and penalized. If you took money out, you weren’t allowed to freely put it back in later, either.
In 2020, you are only allowed to put $6,000 into an IRA. So, if you took $10,000 out to pay for an emergency, you could only put $6,000 back in this year.
The change
Each time you have a child (by birth or adoption), each parent may take up to $5,000 from their IRA without penalty that year. In addition, you may pay it back later. So, the next year, you could put the $5,000 back in the IRA while still adding another $6,000 without going over the limit.
What gives me mixed feelings
As a financial advisor, I must firmly say that using your retirement account to cover short term expenses should be a last resort! It is likely a greater benefit to you and your family to continue to let your investments grow. If possible, avoid robbing “future you” because “current you” is in a bind.
Yet, parents in a tough financial situation now have relief from penalties, which makes me happy! Because people shouldn’t be penalized for using their own money!
2. Bad news for people who inherit an IRA!
When you take money out of an IRA, it is taxed at your ordinary tax rate. That means if you take $10,000 out of an IRA and you are in the 22% federal tax bracket, you will owe around $2,200 in taxes. When you inherit an IRA, you are required take the balance out over a period of time.
How it used to be
You could take a small amount each year over your lifespan. This allowed you to spread out that tax bill into many different years, potentially keeping you in a lower tax bracket.
The change
Most non-spouse beneficiaries must take all of the money out of the IRA within 10 years! This might rocket you into higher tax brackets, causing you to owe more in taxes.
However, with good financial planning, you can strategically choose which years you want to distribute within that 10-year period. So, if your wages dropped for a year, that would be a great year to take more from the IRA. Regardless, by year 10, the account must be emptied.
What makes me uneasy
Many people are unaware of this new rule! If they inherit an IRA without making distributions and don’t realize their error until year 9… they are probably going to be slammed into a higher tax bracket in year 10.
IRAs are still an amazing retirement planning tool, but it is very important that current IRA owners and future inheritors are proactive, informed, and astute. I highly suggest working with a dependable financial advisor if you inherit an IRA.
3. Good news for people over age 70
How it used to be
Once they turned age 70 ½, IRA owners were annually required to take a specified amount out of their account. This is called a Required Minimum Distribution (RMD). You can take out more, but you must take out a least that minimum (so it can be taxed).
Oh… but too bad if you are still working at age 70 ½! You weren’t allowed to save any more money into your IRA after that age. ☹
The change
Drumroll please… you don’t have to take any money out of your IRA until age 72! I realize this might not sound like a big deal to you. However, many people work later in life nowadays. Now, working 71-year olds don’t have to deal with as high of tax brackets. This is a win!
What makes me happy
At age 70 ½, people are allowed to make Qualified Charitable Distributions (QCDs). If you give IRA money to a charity, you won’t be taxed at all!
Even though the RMD age increased to age 72, the QCD age remained at 70 ½. This makes me very happy and it should make you happy too!
Just be aware that if you contribute money to your IRA after age 70 ½, AND you try to make a QCD, you can’t deduct the full amount of your contribution. Ex: If you put $6,000 into your IRA and then you take $7,000 out of the IRA to give to charity, only $1,000 of your gift gets treated with the normal QCD tax benefit.
4. Mixed news for people in a 401(k) plan
How it used to be
Employees who worked less than 1,000 hours in the plan year could be excluded from participating in the 401(k) plan. This left many part-time workers without easy access to a retirement plan. ☹
The change
Employees who work at least 500 hours per year for 3 consecutive years or 1,000 hours in the last plan year must be eligible to participate in the 401(k) plan.
What gives me mixed feelings
This change should allow and encourage more people to save for retirement! This is always good news to me. 😊
Due to some changes, fiduciaries are now more likely to add annuity products as options in 401(k) plans. Annuity products can be useful tools, but they should only be entered in after thorough analysis and discussion. I fear that 401(k) participants may choose (and then be stuck in) annuity products without being fully informed.
5. Good news for people with 529 accounts!
How it used to be
529 accounts could essentially only pay for tuition, directly related education expenses, and registered trade schools.
The change
You can now use 529s to pay for state registered apprenticeships AND for paying up to $10,000 of student loans!
What makes me happy
529 accounts are such useful tools. The more flexible they become, the more students they will be able to help! Read my thoughts on the topic HERE.
Plus, if you graduate with student loans, you can work and put savings into a 529. You can claim the state tax credit and then use the 529 to make student loan payments.
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So, as you can see, the SECURE Act introduced a lot of changes! Some of the changes are a bit complicated, but I know they are nothing you can’t handle! If any of these situations apply to you, remember to handle it one step at a time and ask for help from a professional if needed.
