With the passing of the SECURE (Setting Every Community Up for Retirement Enhancement) Act at the end of December, you may be asking how or if this impacts your financial plan. A few of the bigger changes are highlighted below.
- Delays RMD age to 72 – rules around when to take your required minimum distribution (RMD) have changed. If you did not turn 70½ in 2019, you’ll be able to delay taking your RMD until age 72. The new rule is especially beneficial if you’re still working and hoping to minimize taxable income. This is the first time the RMD age has been adjusted since the 60’s and signifies people are choosing to work longer as longevity increases. The bill does not mention any adjustments to the qualified charitable distribution (QCD) age limit (currently 70½), which has become a popular strategy for charitably inclined retirees. The bill also repealed the age limit that restricted IRA contributions over age 70.
- Repeals the Stretch IRA – choosing to leave your IRA as a legacy to loved ones may no longer be your best option. Inherited IRA’s will now have to be completely distributed within 10 years of the account owner’s date of death, unless they’re left to a spouse. This means your beneficiaries could be hit with significant tax bills in the 10 years following your death. We should note there are a few different beneficiary exceptions to this rule: disabled or chronically ill individuals, beneficiaries who are less than 10 years younger than the account owner, and minor children of the account owner (until they reach the age of majority).
- Penalty Free Withdrawal Exception – there is a new exception to the 10% early withdrawal penalty that allows you to withdraw up to $5,000 from an IRA or qualified plan for a qualified birth or adoption. While the distribution is penalty-free, it would still be considered ordinary income.
Other significant changes:
- 529 plans can now be used towards home school expenses or student loan debt up to $10,000. This is a lifetime limit.
- Kiddie Tax rules revert to previous rules before the Tax Cuts and Jobs Act (TCJA). Any income subject to Kiddie Tax (minors’ investment or unearned income) will now be taxable at the child’s parents’ marginal tax rate.
- Mortgage insurance premium deduction – you can once again deduct your mortgage insurance premiums as an itemized deduction. It’s best to discuss with your CPA before filing your taxes to determine if you qualify for the deduction. This was passed with The Taxpayer Certainty and Disaster Relief Act of 2019, not the SECURE Act.
- Qualified tuition and related expenses deduction – once more, you can deduct qualified tuition and fees paid for you, a spouse, or a dependent up to a certain limit. This was passed with The Taxpayer Certainty and Disaster Relief Act of 2019, not the SECURE Act.
To learn more about how these new changes and more may impact your plan, reach out to your Relationship Manager at The Trust Company of Tennessee.