On Dec. 19, 2019 the U.S. Senate passed the most sweeping retirement bill since the Pension Protection Act of 2006. The new SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement,” made big changes to assist in the ever-changing landscape of retirement planning in the United States today. Below is a list of some of the main changes of which you should be aware:
RMDs are changing: As of Jan. 1, the age at which you need to take required minimum distributions (RMDs) from your traditional retirement accounts increases from age 70.5 to age 72. These distributions guarantee the tax money to the government that you have been deferring since making your contributions years earlier. If you have already started taking your required minimum distributions or if you turned 70.5 in 2019, you will still need to take your distributions this year. However, if you are under age 70.5, you have a bit longer before starting your withdrawals.
Inherited IRAs: This is one of the biggest rule changes to which you need to pay attention. When you inherit an IRA, you are required to start taking minimum distributions from that account. Before the SECURE Act changes, you were able to calculate the distributions over your entire lifetime, which means if you are relatively young, the IRA could stay invested for decades before being fully liquidated. With the new changes, most beneficiaries will have to withdraw all distributions from the inherited accounts and pay taxes on it within 10 years. Exceptions are made for certain beneficiaries, including spouses. This is an especially important consideration if you think you will be in a high tax bracket when you inherit the account.
Penalty-free IRA withdrawals for a new child: If you have a baby on the way or if you are going to adopt a child, the new rules will allow you to take up to $5,000 following the event without paying the usual 10 percent penalty for early withdrawals. You will still need to pay income tax on the distribution unless you pay the funds back, and each spouse is eligible for this $5,000 withdrawal in the same year. Keep in mind, withdrawing funds from retirement accounts will reduce the money available in retirement.
529 payments: Funds remaining in 529 college savings plans after a student graduates can now be used to pay up to $10,000 in student debt over the course of the student’s lifetime. This could significantly draw down your total balance due toward student loans after graduation.
As always, we at oXYGen Financial are here to help you navigate these big changes and help your family use these changes to your advantage.
Allison Baines, Wealth plan design specialist at oXYGen Financial. Co-host of “They Don’t Teach You This” podcast. Connect with her at email@example.com.