I am going to take this opportunity to say thank you to our Congresswomen and Congressmen. It’s because of them that they tend to make our (and many others) profession vital. They prove to us, yet again, that no ‘financial plan’ is safe. This is why Dan and I stress to our clients that any financial plan we create will be wrong.
Hmmmm, maybe I should use a different word. They will be revamped over and over again.
This month Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). What I’d like to know is whose job is it to come up with these crazy acronyms!?! Quite impressive.
Regardless, the passing of the SECURE Act creates changes that will likely affect all of our readers in some way. We wanted to take this opportunity to highlight some of the changes that may affect the two of you.
If you inherit retirement (or qualified) assets from someone other than your spouse in 2020 and beyond, you will now *only* have 10 years to deplete that account. I use the word *only* because previously, you could stretch those dollars over the course of your lifetime. That stretch was beneficial for those who wanted to take distributions in years where their income would be lower (and taxes would be lower, too). That option is no longer available. My suggestion? Quit your jobs at the end of the year (reducing income taxes), start planning a years worth of travel, and take a distribution from your inheritance to pay for your hiatus. Just kidding…. Sort of :).
$5,000 Birth or Adoption Distribution
Children are expensive. That’s not new. What is new is a resource to help pay for those little rascals. If you take an early distribution from a retirement plan, you will have to pay a penalty of 10% (plus federal/state tax for tax-deferred retirement plans). However, Sec 113 allows for an aggregate distribution of $5,000 for a qualified birth or adoption. The distribution would need to occur within one year of birth or the adoption becoming final for the child under the age of 18. A few things to note with this:
Kiddie Tax Reverts Back
This one is a bit tricky. Income subject to Kiddie Tax is back to being taxed at the parents’ marginal tax rate. Although the change is effective for 2020, taxpayers can actually elect to apply the previous Kiddie Tax rules (using trust tax rates) to the current 2019 AND 2018 tax year. In order to change what was filed in 2018, you would have to file an amended return. It’s important to have a conversation with your financial planner and accountant to determine the best strategy for your children's unearned income in 2018 and 2019.
Qualified Education Expenses for 529 Plan Have Expanded
Two years ago, the Tax Cuts and Jobs Act expanded the use of 529 Plans to up to $10,000 annually on K - 12 expenses. We have now been granted even more access. The SECURE ACT provides the following additional qualified expenses from 529 Plans:
Taxable Non-Tuition Fellowship and Stipend Income
We live in Rochester, MN, which is home to the Mayo Clinic. So doc, this one’s for you! For those who receive taxable income for a fellowship or stipend, you can now use those dollars to make a contribution to an IRA!
Tax credit for small businesses that establish a 401(k), 403(b), SIMPLE IRA, or SEP IRA
Currently, if you are a small business and you establish a retirement plan you can receive a credit of $500 for up to three years for costs related to establishing a retirement plan. A small business is defined by having no more than 100 employees who receive at least $5,000 of compensation from the employer. Effective 2020, your small business will receive a credit (for up to three years) in the greater amount of:
Additional Retirement Plan Changes
Deductions: Mortgage Insurance Premiums and Qualified Tuition and Related Expenses
It’s back with a vengeance! These two tax benefits for individuals are here again and retroactive to 2018. These two deductions have only been made effective through 2020 (so it’s very possible it could go away… again… and come back...again…)
Required Minimum Distribution (RMD) Age Change
If you defer taxes in a retirement account (like a traditional IRA), the IRS eventually requires you to start taking distributions from that account. For most working professionals, whether you are just entering or you are retiring in a few days, your expected age to start taking these mandatory distributions was 70.5. However, for those who turn 70.5 in 2020 or later they now are not required to take distributions until age 72!
There is much more to the SECURE Act than what we discussed above. In order to see how all of the changes affect your specific situation, speak to one of us! Also, I have to give a huge shout out to the Nerd’s Eye View blog where most of the information above was obtained. Their team does an excellent job of deciphering how new legislation affects financial professionals and individuals.
In the last 10 years, we’ve seen a variety of changes in Tax Legislation; SECURE Act, Tax Cuts and Jobs Act of 2017, Protecting Americans from Tax Hikes Act of 2015 (PATH), and the American Taxpayer Relief Act of 2012 to name a few. Our goal is to keep you informed on the major changes that occur and provide you guidance with how best to navigate going forward.
Thank you for reading! Have a wonderful and safe New Year celebration.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.