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The SECURE Act of 2019: Impacting Retirement Planning…and More

While much public and media attention was focused on impeachment in December 2019, the most extensive change to retirement savings legislation since 2006 was signed into law. The SECURE Act was included in the year-end spending bill (i.e. the federal budget) that Congress approved right before the holidays, and signed into law by President Trump on December 20th, notes Cynthia Andrade (CFA), and Contributing Editor to MONEYLETTER. Andrade discusses the five main changes in the SECURE Act which could have an impact on your investing or retirement planning:

The SECURE (Setting Every Community Up for Retirement Enhancement) Act is a bipartisan bill first passed overwhelmingly in the House in May. A companion bill in the Senate failed to advance in the Finance Committee. But elements of both bills were incorporated into the fiscal year 2020 spending bill. The Act includes numerous provisions to strengthen the level and security of retirement saving. Many of the changes impact IRAs and other qualified retirement plans. Other provisions allow for easier and expanded small business retirement plan offerings and expanded uses of college 529 plans. Note: these changes take effect for the 2020 tax year.

Changes for IRA Account Holders

There are five main changes in the SECURE Act that potentially impact IRA holders:

1. Required minimum distribution (RMD) age; IRA owners have been required to begin RMDs by April 1 of the year following the calendar year in which they turn 70-1/2. That age has been changed to 72. IRA holders who turned 70-1/2 in 2019 must still begin RMDs this year. This allows IRA holders more time to let their tax-deferred savings grow.

2. Maximum contribution age has been repealed: Previously, even if an individual had earned income, he/she could not contribute to an IRA beyond age 70-1/2. ln recognition of Americans living longer and often working past traditional retirement ages, those who are still working beyond age 70-1/2 can continue to contribute to IRAs.

3. Penalty-free withdrawal allowed for a new child: Penalty-free withdrawals of up to $5,000 from IRAs, 403(b)s, 401(k)s, or other qualified workplace retirement savings plans are allowed for costs related to the birth or legal adoption of a child, within one year of the event. The account holder can also repay the withdrawal to the plan later and have it treated as a 60-day rollover. Note: While there is no penalty, a parent would still have to pay taxes on the withdrawal.

4. Graduate/Postdoctoral students gain: The SECURE Act has expanded the definition of earned income to include taxable fellowships or grants received in the pursuit of higher education. That gives these students an opportunity to start saving for retirement earlier.

5. RMDs for retirement account beneficiaries tighten: Current law generally allows individuals who inherited IRA accounts from someone other than a spouse to withdraw minimum distributions over the calculated span of their lifetime (stretch provisions). The SECURE Act now states that while there is no required annual distribution, the entire amount must be distributed within ten years. This will create tax implications, especially if the beneficiary inherits during peak earning years. (Exemptions apply for minor children, disabled or chronically ill individuals, and certain other circumstances.) Until now, naming children/grandchildren as beneficiaries has been an oft-used wealth transfer strategy. Affected individuals may want to consult with their financial advisor/accountant on alternative strategies.

Changes for Employees

Several changes were made in the SECURE Act to facilitate the availability of employer retirement plans to workers. Many of these changes support smaller businesses.

A tax credit available for small employers who establish a retirement plan is increased beginning in 2020. Small employers also can claim a tax credit for offering automatic contributions to participants' retirement accounts.

The cap for auto enrollment contributions is raised: Employees can increase the amount withheld every year until they are contributing 15% of pay to retirement (previous max was 10%).

Part-time workers' eligibility expands: Individuals who have worked more than 500 hours per year for three years or a minimum of 1,000 hours during the past year are eligible for the employer's 401(k) plan. That should allow for increased employee participation.

Multiple Employer Plans (MEPs): Rules have been relaxed to allow unrelated small firms to join together to offer a retirement plan to employees, again expanding availability.

Changes in 529 Plans

In cases where families have excess monies in their college savings plans, the SECURE Act expands the allowed use of these funds.

Qualified education expenses expanded: Students who enroll in registered and certified apprenticeship programs may now use 529 plan distributions to cover qualified expenses such as books, supplies, and equipment. (Such programs were not previously covered.)

Student debt: New rules allow the use of 529 assets to pay student loan debt for the plan beneficiary and/or their sibling (with a lifetime limit of $10,000 for each).

Bottom Line

These changes are predominately beneficial to investors. But more are needed as many Americans are still without good choices for retirement saving. Bottom line: If any of the SECURE Act provisions could have an impact on your investing or retirement planning, we strongly urge you to consult your financial planner/accountant to ascertain how to best adjust your strategies.

Editor’s Note: Cynthia Andrade (CFA) has been a financial writer and contributing editor to the MONEYLETTER, 479 Washington St., PO Box 6020, Holliston, MA 01746, 1 year/12 issues, $180 since 1980.

MONEYLETTER contains clear asset allocation and buy/hold/sell advice. Database includes more than 850 funds, including Exchange-Traded Funds (ETFs). View the 6 key benefits of a MONEYLETTER subscription, at www.moneyletter.com.

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