Retirement Planning Changes Coming in 2020
3 Minute Read
The SECURE Act was officially passed in congress last week, putting into law the most significant changes in retirement planning in years. I will be discussing any applicable planning items with each client at their next review meeting.
The first part of this update provides a brief overview of the important changes coming to retirement planning.
Under my analysis further down, I take a deep dive into some specific retirement planning scenarios around this new legislation. If you have any questions at all, please do not hesitate to contact me at the office.
Age 70.5 Distributions (RMDs)
Current law requires those with Pre-tax retirement accounts to begin distributions at their age of 70.5. These Required Minimum Distributions (RMDs) typically start at around 4% of your account balance, and increase with age. These required minimum distributions will be pushed back to age 72.
Traditional IRA Contributions Allowed After Age 70.5
If you have W2 or self-employment earnings and are over age 70.5, you can now continue to make tax deductible contributions to a traditional IRA where you could not do this previously.
College 529 plans can now be used towards repaying student loans up to $10,000.Inherited IRA Must Be Distributed Over 10 Years
Currently, a non-spouse beneficiary of a Pre-tax retirement account can keep the monies invested and take distributions based on their life expectancy. The new law requires these accounts be distributed and taxes paid over a 10 year period. There is no longer an annual required distribution, just that the entire account has to be distributed and taxed by the end of the 10th year.Annuities and 401(k) Plans
An employer that uses an annuity company for their 401(k) plan, and that annuity company offers a guaranteed payment at retirement, are safe harbored from being sued by participants for excessive fees, poor investment performance, or pretty much anything else that isn’t blatantly egregious.
If you have significant Pre-tax retirement monies and hope to leave a majority to children, it could make sense to start converting those monies over to Roth and pay the taxes now.The stripping down of the Inherited IRA could leave a child beneficiary with a significant tax liability upon inheriting a Pre-tax retirement account. The idea is that a retiree will most likely be in lower tax brackets than a child beneficiary in the midst of their career.For example, a $500,000 Pre-tax IRA that is left to a child in the 22% tax bracket could equate to a $110,000 tax liability, and that doesn’t include any applicable state taxes.
Another idea is earmarking a life insurance policy towards that future tax bill and make your children beneficiary. Life insurance proceeds are tax free, and can be an effective way cover future tax liabilities.
Beneficiary Strategy
A strategy for a married couple hoping to leave much of their Pre-tax assets to children could be adding the children on as primary beneficiary along with a spouse. Upon the death of the first spouse, the children would start inheriting a smaller portion the money, opening the first 10 year withdrawal window. At the death of the second spouse, the children would inherit the remainder of the money, opening the second 10 year window. This could extend the 10 year window by as much as double, allowing the tax liability to be spread out over a longer period of time.
529 College Savings Plan:
If you are a grandparent funding a 529 for a grandchild, consider using the 529 to pay the student loans up to that $10,000 limit. Distributions from a 529 plan sponsored by a grandparent count as income on the child’s FAFSA. Income is the most heavily weighted factor in determining college financial aid.
In the past, it has been recommended to wait until the students junior year for distributions. The new legislation could make it more advantageous to keep the money invested a couple of extra years and earmark towards loans, particularly if the student plans on any post graduate schooling.
I hope this information is helpful and again, if you have any questions please contact the office as I would be glad to review this in more detail. I hope you all have a wonderful holiday and a Happy New Years!