What the New Tax Law Means for Your Retirement Planning

A new tax bill was signed into law on December 20, 2019. With the long name of Setting Every Community Up for Retirement Enhancement, or SECURE Act for short, it has introduced some important changes for those who are thinking about (or just entering) retirement.

Here’s what you need to know.

No more age limit for IRA contributions!

Let’s talk about the good news first.

Effective 1/1/2020, the age restriction on IRA contributions is officially out of the window. Under the old rule, individuals aged 70 ½ were no longer allowed to contribute to their IRA accounts, even if they were still working. The SECURE Act eliminates that age limit, as long as the individual is still receiving “compensation” (i.e. wages or self-employed income).

So what? If your retirement plan relies on working for a few extra years to allow your nest egg to grow, the SECURE Act might offer another avenue to help.

No more Stretch IRA

Tough news: Also gone is the “Stretch IRA”

If you are wondering what a “Stretch IRA” is, here’s a brief explanation. Under the old rules, a non-spousal beneficiary of an IRA could “stretch” the benefits over his or her lifetime. That meant more years to withdraw the money (and pay the related taxes).

Under the new rules, the entire IRA balance inherited by a non-spousal beneficiary must be withdrawn within 10 years of the original account holder’s death. There’s a handful of exceptions, such as when the beneficiary is disabled, chronically ill, or a minor. For everyone else, it’s 10 years or bust … unless you work with a tax CPA who has years of tax return experience and a strong grasp on the SECURE Act.

Important note: The new law only affects IRA accounts inherited after 1/1/2020.

So what? If you have a large IRA and want to “earmark” it for someone other than your spouse, you may need a Plan B and/or a consultation with an experienced tax CPA.

Greater access to retirement savings plans for part-timers

Part-timers have always had limited access to benefits compared to full-time workers. Some of that imbalance is eliminated with the SECURE Act. If you work 1,000+ hours during one year, or have 3 consecutive years with 500 hours of service, you may now be eligible to participate in a retirement savings plan.

Important caveat: Employees who are a part of a collective bargaining arrangement aren’t affected by the SECURE Act.

So what? If you are a part-timer, ask your employer about any changes to your benefits.

Up to $10,000 of 529 plan funds allowed for student debt repayment

This provision is most relevant for families with a student who is about to graduate (or who has recently graduated) with funds leftover in an educational savings account. Under the SECURE Act, up to $10,000 of those funds per year could be used to pay back student loans.

So what? Families get greater financial flexibility to help children pay back their student loans.

Required Minimum Distributions delayed until age 72

This is a provision that mostly spells good news.

Under the old rules, traditional IRA Accounts (as well as SIMPLE and SEP IRAs) would require the account holder to withdraw a certain amount annually once the owner has reached 70 ½ years of age, and to pay taxes on that distribution.

Many retirees count on their IRA accounts to cover their living expenses. Those families need to take the money out anyway, with or without RMDs. If you are in that situation, you are likely to be unaffected.

However, if you would rather not take the RMDs, the SECURE Act gives you a temporary stay until you turn 72. And while the start of RMDs is being pushed back to age 72, you can still start Qualified Charitable Distributions at age 70 ½.

So what? You could potentially get a unique one to two-year window of tax planning opportunity if you want to donate appreciated investments to a charity and take a tax deduction.

What the new tax law means for your retirement

The answer is, as for many things both financial and legal, “It depends”.

Some families will have to re-consider their approach to estate planning, perhaps looking at life insurance or other vehicles to transfer wealth (instead of the IRA). Others will enjoy extra years of contributing to their nest egg, greater access to employer-sponsored retirement plans, and more opportunities to help their children pay for college.

Here’s what you can do on your own: Check the beneficiaries of your IRA, look at 529 plan balances in relationship to your child’s college career, and call your financial planner to see how the new law might affect your retirement plan.