Each new year brings with it goals, resolutions, and optimism for what lies ahead. This year it also brought a whole host of changes to the retirement landscape in the form of the SECURE ACT. The SECURE ACT was tacked onto the year end spending appropriations bill (HR1865) along with a few tax extenders. The SECURE ACT stands for “Setting Every Community Up for Retirement Enhancement”. Like most legislation it is a mixed bag that won’t help everyone, butit will most certainly affect everyone.
The scope of the SECURE ACT is large enough that we’ll need to consume it one bite at a time. We will start with the main changes impacting IRAs and 529 Plans includinga brief summary of
SECURE ACT
Elimination of the Stretch IRA: The “Stretch IRA” was a provision that made it possible for beneficiaries of IRAs or Roth IRAs to spread out the distributions of the account over their lifetime. Moving forward the Stretch IRA will only be available to spouses, minor children of the account owner (until they reach the age of majority), beneficiaries ten years younger or less than the account owner, and special provisions for those qualifying as disabled or chronically ill (as defined by internal revenue code Section 72(m)(7) and Section 7702B(c)(2) Everyone else will now have 10 years to distribute the balance of the account
Extension of the Required Minimum Distribution (RMD) Age to 72: Previously you were required to take distributions from qualified retirement accounts (with some exceptions for those still working) starting with the year you turned 70 ½. That starting age has been pushed back, however, if you were required to take a RMD in 2019 you must continue taking your distributions under the original rule.
New Exclusion to the 10% Early Withdraw Penalty for IRAs Starting in 2020 IRA account owners under the age of 59 ½ can withdraw up to $5,000 penalty free (income tax is still due)
IRA Contributions Allowed at Any Age: IRAs were the only retirement account that limited contributions based on age. This has now been changed to allow savers past the age of 70 ½ who have earned income, or a spouse with earned income, to contribute to an IRA.
Expanded Qualified Educational Expenses for 529 Plans: Qualified Educational Expenses that allow for tax free withdraws from 529 Plans now include fees, books, supplies and required equipment for Apprenticeship Programs and payment towards existing student loan principal or interest ($10,000 lifetime limit).
Tax Extenders
Now onto the tax fun. While the SECURE ACT was about change, these tax extenders were about keeping tax provisions from expiring or reverting to a previous version (but only through 2020). Here are a few of the highlights:
Deducting PMI Insurance: Premiums for mortgage insurance will once again be allowed to be deducted along with your home mortgage interest.
Deducting Medical Expenses: Qualified Medical Expenses that exceed 7.5% of AGI (Adjusted Gross Income) can continue to be deducted instead of reverting to the 10% threshold they were scheduled to. This ties back into qualified retirement plans, since this is also the rule that decides if you can take an early withdraw from an IRA or workplace retirement plan to cover medical expenses without incurring the 10% penalty. The bar in now lower for both, at least for Qualified Tuition and Related Expenses Deduction This allowed you to deduct qualified tuition and related expenses that you pay for yourself, your spouse, or a dependent provided you meet the income qualifications.
More SECURE ACT Details
These represent the “highlights” of the SECURE ACT legislation and will get the most press but less common components will trickle out over the course of the year. For example, additional changes to workplace retirement plans for individuals and small businesses will be addressed in a separate note early next year
The highlights are nice, but the devil is in the details. We will continue to explore many of these changes in greater depth as we head into 2020, especially rule changes for RMDs and Stretch IRAs. We will continue to review, assess, and plan around the new changes as they come into effect. As the laws change so will our strategies so we can continue to help you navigate the most effective ways to reach your financial goals.