A couple of bills containing significant changes to retirement planning were signed into law by President Trump on December 20, 2019. We will provide just a few of the sweeping changes that affect most of us planning or currently in retirement. The Setting Every Community Up for Retirement Enhancement Act of 2019 (commonly referred to as, “The SECURE Act of 2019) is effective for tax years beginning January 1, 2020.
If you are reaching the age of 70-1/2 and anticipated taking a distribution from your IRA, or suffer a penalty, the Act extends the date of required minimum distributions to age 72. When the present age of 70-1/2 was applied to IRA distributions, U.S. citizens were living fewer years, on average, than they are now. By increasing the age of required minimum distributions to age 72, the federal government has deferred revenue for another one and a half years which allows continued growth of the retirement funds. Many of our clients do not need or desire the distributions required under previous law. However, the penalty for failing to withdraw the IRA funds was more costly than the effective tax rate applied to the distribution. In other words, it was far cheaper to simply take the distribution and pay the tax bill.
The Act has closed a very effective generational planning strategy used by many people. No longer can your IRA be utilized for multi-generational planning (i.e., your grandchildren could have benefited from a “stretch” IRA strategy in the past). Under the provisions of the Act, the non-spouse beneficiary, or any beneficiary more than 10 years younger than the IRA owner, must take the full IRA value by the end of the tenth year after the death of the IRA owner. Of course, taxation will occur at a much sooner date than previously recognized due to the distribution occurring within ten years of death of the IRA owner.
Congress and President Trump have expressly acknowledged that children require families to spend money for housing, clothing, food, etc. Another relief item for individuals adopting or birthing children is the use of $10,000 of your employer-provided retirement plan assets without penalty. Although the participant will be required to pay income tax on the distribution, the 10% penalty for early withdrawal will not subject the family to additional burden.
IRAs can be confusing for individuals. To assist you with helpful information, please go to Compass Capital’s Resource Center and watch one of our instructional videos. If you have any questions regarding your particular retirement plan facts, seek out a Certified Financial Planner practitioner and CPA that specializes in families just like yours.