The SECURE Act: 5 retirement and tax changes every American should know

Last year was a big year for changes to retirement planning as contribution limits increased significantly for almost all plans and ages. At the tail end of 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which ushered in significant changes to retirement savings rules. Like most substantial pieces of legislation, the SECURE Act also included some tax changes that aren’t directly related to retirement. In the end, the SECURE Act is going to touch people at many phases of life, including:

  • IRA owners over age 70.5
  • People who are age 70.5 or younger and haven’t yet taken a required minimum distribution
  • Anyone whose estate plan included a stretch IRA
  • Anyone who might inherit an IRA
  • Everyone who plans to retire someday
  • Small business owners
  • New and expectant parents
  • Current students
  • Student loan borrowers in repayment
  • Workers in an apprenticeship
  • Anyone under age 24 whose unearned income was affected by the Kiddie Tax
  • Anyone who fails to file a tax return

That’s right: the majority of American adults can expect at least minor changes from the SECURE Act. Read on to learn about the highlights related to retirement planning and other tax incentives. If you’re planning to retire early, check out our video about what it takes to retire at age 55. We’ve included a downloadable worksheet to help you calculate what you’ll need to reach financial independence.

1. You can continue to contribute to your traditional IRA indefinitely.

The SECURE Act eliminated the 70.5 age limit for traditional IRA contributions, which means individuals over age 70.5 can contribute to their IRAs beginning in 2020. Generally, the tax deadline for contributing to a retirement account is April 15, which means most people can still make contributions that will impact their 2019 tax bill. If you’re already over age 70.5, however, you cannot at this time make contributions for tax year 2019.

It’s worth noting that there wasn’t a previous age limit on contributing to a Roth IRA, and the SECURE Act hasn’t altered that rule.

Tip: If you’re over age 70.5, plan ahead for 2020. Those of you who haven’t been able to contribute to an IRA for a few years and wish to do so now will want to look at possible tax implications.

2. The age for required minimum distributions has increased to 72.

If you were younger than age 70.5 on December 31, 2019, you have a bit more time before you’re required to take a minimum distribution from tax-advantaged retirement accounts (i.e. traditional IRA, 401(k), or SEP account). Those of you who have already begun taking required minimum distributions are unaffected by this change, even if you haven’t reached age 72. Roth IRAs do not have a required minimum distribution age.

3. Stretch IRAs have been cut short.

First, an explanation of the stretch IRA: if you inherited an IRA from a deceased relative who wasn’t your spouse, you were subject to required minimum distribution rules (based on your life expectancy as defined by the IRS), but you could keep that account open (and continue to reap tax benefits) for as long as the required minimum distribution allowed. Many people have used this stretch IRA strategy to the advantage of their heirs in estate planning due to the tax benefits of a Roth IRA, which allows contributions to grow and be withdrawn tax-free.

Under the SECURE Act, non-spousal heirs must empty and close the inherited IRA within 10 years of receipt. There are some exceptions to the rule, including the decedent’s surviving spouse and minor children. Beneficiaries who are no more than 10 years younger than the deceased, as well as chronically ill beneficiaries, are also excluded from the 10-year requirement. Again, these new rules are effective only for account owners whose passing occurs in 2020 or later.

Tip: If a stretch IRA is part of your current estate plan, it’s time to reexamine the options and determine whether an alternative would be more advantageous.

4. Small businesses have attractive new options to provide retirement plans for their employees.

One of the goals of the SECURE legislation was to increase access to 401(k) plans. The most common reason small businesses don’t offer retirement benefits has, in the past, come down to cost. Under the SECURE Act, the tax credits for small businesses sponsoring a 401(k) plan for their employees have increased significantly, and Pooled Employer Plans (PEPs) are another option that any employer can join with overall reduced risk.

Tip: If you run a small business and haven’t offered a 401(k) plan in the past, you have until April 15, 2020, to implement a plan and apply tax credits to your 2019 tax bill. We can help you with set-up and understanding the bottom-line financial impacts to your business.

5. There are many other tax changes for people in a variety of circumstances.

Here’s a quick rundown of the most common situations:

  • Distributions from 529 plans can now be used to cover fees and supplies for apprenticeship programs, provided the program is registered with the Department of Labor.
  • Qualified education loans can be repaid with 529 funds, up to a $10,000 lifetime limit.
  • New parents can use retirement plan funds to cover births and adoptions, up to $5,000 without penalty.
  • The Kiddie Tax calculation reverts back to pre-TCJA rate and can be applied to 2018 and 2019 tax returns. If your income was subject to the Kiddie Tax in 2018, an amended return may be able to send a refund your way.
  • The penalty for failing to file a tax return has increased to $400, or 100% of the tax due (whichever is less).

What are the takeaways for the average American?

If you are impacted by any of the points we listed above, we recommend seeking a professional opinion prior to making any significant changes. As with any tax regulation, there are qualifications and nuances related to each individual’s circumstances that may impact how these changes affect you. We offer a free consultation for all prospective/new clients, and we encourage existing clients to reach out and ask questions. Our goal is to be your trusted, strategic advisor who helps you accomplish your financial goals. Please contact us to schedule a conversation.