In today’s episode, we discuss the SECURE Act legislation that passed in December and how that might impact your retirement planning. We’ll also discuss some other updates for 2020.
- Learn about changes for tax year 2020
- Learn about the changes to the Required Minimum Distributions or RMD’s
- See what the elimination of the “Stretch IRA” means for you and potentially your legacy planning
The Fidelity 2020 New Years Resolution Study
The SECURE Act details on Congress.gov
Welcome to agile finance radio. I’m your host Jason stump, and our goal is to help you Win with money, gain at life, and retire with confidence.
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In today’s episode, we are going to talk about the recently passed into law SECURE act, which is the Setting Every Community Up For Retirement. We’ll discuss what that means for your retirement and what areas you may need to review because of the tax law changes.
In addition, we’ll talk about other 2020 updates for your personal finances and what you should take action on now.
Before we get to that, I’m hoping that you’ve set some goals for this year, if not go back and [listen to Episode 9.] I just read a New Years financial resolution’s study by Fidelity and it said the top three resolutions people were considering were to: First Save more: 53% Second is to Pay down debt: 51% And third is to Spend Less: 35%.
If you did listen to my last episode, you’ll know that those aren’t really goals but I’ll give the individuals the benefit of the doubt since I’m assuming that the survey couldn’t be that specific.
So those are good resolutions to think about, but we just need some details behind those to make them actionable. Now some of the motivations listed were living a debt-free lifestyle, ya know, having a comfortable life in retirement, which, ya know, I’m all for that, right. I am big on the planning aspect of those things and 50% of those that were surveyed said they will increase their annual retirement contributions, which is awesome.
So the question is "what are you going to do?" If you don’t have your finances on autopilot, like I [discussed in Episode 6,] life-style creep will happen and you won’t make any progress on your goals.
One thing you could do is figure out your retirement number, ya know that’s what will tell you if you are saving enough.
And if you haven’t done that, then setup a call with me. I offer a complimentary 15-20 minute call to evaluate your situation. We can get to that ball-park number in that time and it’s at no cost to you. At least with that knowledge, you can start thinking about a plan or decide to get some advice.
So I challenge you to make 2020 the year you get a clear vision on your finances.
Alright, let’s move in to some minor updates for 2020. If you haven’t noticed the IRS did raise the contribution limits. You can now contribute a little more to your 401(k) so $19,500 is the limit and if you’re fifty or older you can contribute via the Catch up contribution, which is $6,500.
Unfortunately, they did not raise the limit on IRA’s so you can contribute $6,000 to the IRA and an additional $1,000 for those that are fifty and older for the Catch up contribution.
There are also some income limits that have moved around a little bit, just went up slightly. So for example, you contribute to a Roth IRA, there are income limits and if your AGI, which is Adjusted Gross Income, is less than 124K for a single person or less than 196K for a married couple filing then you can contribute to a Roth IRA. There’s also a small phase out period there where you can’t contribute as much as well, but those details should definitely be discussed with your advisor or just do some quick research on that.
For taxes, the Standard Deduction when up a little for filing taxes that’s for 2020. $12,400 for single and $24,800 for married couples. The majority of folks are now using the Standard Deduction that with the recent tax law changes, a couple years ago. The deductions that you can take there’s just not as many anymore. They’ve limited the amounts so it’s really important if you’re close to the Standard Deduction and you’ve got an opportunity to bunch some deductions together, like medical or charitable contributions. Then, it might make sense to do some special planning around that to see if you can take any more out of your deduction and move past that standard Deduction amount.
Okay, lets move on to the big change that occurred in late December, Congress passed that Secure Act. And one of the changes that was made in the Act was increasing the retirement age for Required Minimum Distributions, or RMD’s, as their sometimes called. Prior to the change, you use to have to start taking distributions in the year that you turned 70 1/2. Which I always thought was odd. Who in the world thinks about things they you have to do on your half year birthday, besides my kids? They celebrate those types of things since if you are a summer baby you never get to have a birthday party in school, thus the half year birthday.
But thank goodness some common sense entered the conversation and now you don’t have to start taking distributions until the year that you turn 72. Well actually, I’m not sure that there was any common sense involved, but we’ll take what we get.So you get a little extra time to do planning before you have to take out those required distributions. The same rules apply as prior, when you technically don’t have to take the distribution out until April 1st of the following year. But you may not want to do that because you will have to take out your RMD for when you turn 73 that year as well and that could push you into a higher tax bracket. So running the numbers and planning through that is important. No use giving up more of your money to taxes.
Now, the majority of retirees take their distributions prior to when RMD’s kick in, but for ones that can wait it’s an important planning opportunity. So there are potential conversions specifically converting to Roth that can be used for tax planning strategies that will benefit you later on down the line.
One note about the age is it doesn’t push back the life expectancy tables that are currently used. So if you choose to take your RMDs at 72, you’ll just start at that age in the tables. However, there is proposed legislation that could potentially change that in the near future.
Contributions after 70 1/2
So speaking of our IRA’s, the ACT also now allows you to contribute to a Traditional IRA after you turn 70 1/2. Prior to that law, you could not make a contribution in the year that you turned 70 1/2. So if you were still working um you got penalized and couldn’t save to your IRA.
Now, as long as you have earned income you can contribute to a traditional IRA. And oddly enough, this was the only retirement account left that had the age contribution restriction.
One thing that didn’t change and but now might be a source of confusion, is if you’ve made a Qualified Charitable Distribution or sometimes called a QCD. That age didn’t change. So you’ll still be able to make those when you turn age 70 1/2. And please note that is when you turn 70 1/2 not the year of when you turn 70 1/2 just to cause more confusion. So this still might be a great option if you are charitably inclined, so you’d still be aloud to make those contributions directly to a charity. So just keep in mind it’s not satisfying any RMD at that time if it’s before the new required age of 72, but it would still reduce the amount that’s in your IRA so when you did start taking RMD’s that would be on that reduced amount of your IRA once you start pulling those out.
Elimination of the Stretch Provision
One of the biggest changes with the ACT is the elimination of what is commonly called the Stretch IRA or Inherited Stretch IRA and specifically for non-spouse beneficiaries. So it actually applies to other defined contribution plans as well, but most people know it by just the IRA portion.
So under prior law, beneficiaries like your kids or anybody else you wanted to give it to, or even a trust, could stretch out the distributions over their life expectancy. And this was a huge planning technique to reduce the overall tax burden from an IRA inheritance.
But now, the new rule in the SECURE Act for 2020 and beyond will require those funds to be emptied within 10 years. Now one could argue, what’s the big deal? Those funds were for the owner or their spouse anyway because it was saved for their retirement and not someone else.
Well that’s true, but this option has been available for so long that it was a common legacy planning option. So why did they allow it in the first place? It just looks like another way the government is attempting to increase the revenues in my opinion, but hey we’ll work with it.
And this is why it is critical to be active in your finances. Laws change and so does your life for that matter so you have to make sure your plan is being updated frequently as well.
Thank goodness they left in the provision for what the bill calls Eligible Designated Beneficiaries, such a nice name for what you call your spouse for example. For these beneficiaries the 10 year rule will not apply and it follows the old rules as it was before the Act.
So if you are a spouse, if you are disabled, chronically ill, for certain minor children, or a beneficiary within 10 years of the age of the decedent, then you’ll be able to follow the old rules. However, just like everything else in laws, there are some special criteria that has to be met or followed to make this work. If you’re looking at the Stretch provisions for one of those eligible beneficiaries you’ll need to dive in to the details on that.
If you were planning on stretching your IRA then you may need to come up with a Plan B or work with an advisor to do that. So if you already have an advisor then they certainly should be reaching out to you or should be asking-or you should be asking them how the Secure Act might effect you.
Another area where the Secure Act could create some trouble is for people that have a trust as their beneficiaries, which is a reasonable option for certain individuals. With the Secure Act it could make certain types of trusts not as advantageous as they once were.
So that 10 year rule could cause significant tax consequences and the IRS is not totally clear on some areas around how those eligible designated beneficiaries will be treated. So this is something you’ll want to look into and see if having a trust as your beneficiaries makes sense in your situation.
Misc Secure Act
Now a couple of miscellaneous things that were in the bill, I mean this bill was pretty big it was a fairly significant piece of legislation so there’s lots of other things in there. And I’m just trying to pull out the things that make most sense to you, but here’s some other things that came across
- You can take a $5,000 distribution from your IRA for a qualified birth or adoption penalty free so this adds this as one of the exceptions to early the withdrawal. So no penalty for that.
- There’s several benefits for small businesses related to retirement plans. So if you own a small business you definitely need to be aware of these things.
- Um there was some changes to the 529 education plans, so expenses are expanded into apprenticeships. So if you’re going that route for your career you’ve got new things that may qualify to pull out of your 529 plan.
- The Kidde tax reverts back to a-the child’s parents’ tax rate, which was just changed two years ago in the Tax Cuts and Job Acts. So they did a full reversal act of that, which is just crazy.
- But the most bizarre thing is the elimination of the ability to take out a 401k loan via a credit card! I didn’t even know that was a thing, but thankfully they’ve put a stop to it and thank goodness it didn’t catch on. It’s bad enough that we have 401k loans in my opinion so being able to do that with a credit card, which tacked on all kinds of other fees, that was just insane.
Well, as you can see, there’s quite a bit of information in this piece of legislation. There’s a lot more in it but ya know some cases deal specifically with companies, employers, and some edge cases. But hopefully this has given you some things to think about and maybe some things that you might need to take action on. It might be a good time to meet with an advisor to go over your situation as well. If that’s the direction your leaning, head over to my website agilefinanceradio.com and select the "work with me option." I’d love to chat with you to see if it makes sense for us to work together or we can just get to your number and see where your retirement number is so that you have a clear path on the things that you need to do next.
Well that wraps up this episode of agilefinanceradio For links to the fidelity study or if you want to read the entire bill for some great late night reading head on over to agilefinanceradio.com/10
And be sure to tune in next time as we discover more ways to win with money, gain at life, and ultimately retire with confidence.