72 Is The New 70 ½
Our intrepid employees in Washington DC have once again passed a last-minute tax act, part of which is retroactive for the entire year of 2019. Apparently, none of them actually prepare their own tax returns. This law, known as the SECURE Act, is 715 pages long. I haven’t read all of it yet but I doubt if many members of Congress have either. However, I have reviewed it and will be sharing some of its highlights in today’s article.
I drew the title from one of the changes of import to retirees. In the past, Required Minimum Distributions from IRAs have generally been required during the year a taxpayer turns 70½. For those who have not achieved that milestone as of December 31st, 2019, the new rules move the RMD trigger date to the year in which a person turns 72. There is no allowance made for those who are already taking RMDs based on the old rules. Those folks must continue to do so.
The new law allows those working past age 70½ to continue contributing to their IRAs. Since our population is tending to work longer and is certainly living longer, this seems appropriate. While a plus for many individuals, it is among those provisions which will increase our national debt.
To counteract that reduction in government revenue, the act makes inherited IRAs more difficult to manage. Taking distributions over an heir’s lifetime has been replaced with a ten-year limit. This will increase the yearly income of the inheritor, thus the amount of tax collected. Those of you who were planning to leave IRAs to children will have to re-think that strategy in light of this change. As is true with the RMD rule, those already taking ‘stretch IRA’ distributions can continue as they have in the past.
Those who have or adopt a child can withdraw $5000 from an IRA tax- and penalty-free within the next year to pay for related expenses. While this seems to be a benefit to young families, young families eventually become old enough to retire. In retirement, that money is likely to become very important because income from earnings must be replaced. Considering the lost compounding effect resulting from taking a distribution at an early age, we’d want to discuss this decision very carefully with a client before agreeing that it makes sense.
Although the average college debt is just over $31,000, the sheer number of students attending college – more than two-thirds of high school grads – makes their total debt a dependable headline-grabbing amount: around $1.5 trillion. One of the changes in the act allows for parents that have money left in 529 plans to use up to $10,000 of it to pay down college debt. The SECURE act offers an interesting planning idea for Indiana parents & grandparents who have the desire and ability to assist with college debt. Instead of giving money to students for payments, a contribution could be made to Indiana’s College Choice plan, providing a state tax credit, then a college loan payment made from the 529 account. Would it count as income to the student? Probably. Would it be a tax-efficient way to help? Almost certainly, making it another topic we’ll be discussing with our clients this year.
For those still working, new rules will offer additional retirement plan options. Traditionally, such plans had to be sponsored by an employer but the new law allows for the establishment of “open multiple employer plans,” which might make retirement savings available to employees of businesses too small to afford a plan on their own. For example, a Chamber of Commerce could sponsor a plan for its smaller members even though they have nothing else in common. The act also allows for retirement plan participation by long-term part-time workers, reducing the required number of hours worked per year from 1000 per year to 500 (for those who have worked three consecutive years).
Most of the rest of the world has a larger percentage of organ donors than the US because their systems include automatic enrollment and require an active decision to opt out. This gap is also true of retirement plans. The SECURE act hopes to increase the percentage of workers who have retirement plans by subsidizing plans that feature automatic enrollment. Nobel Prize-winning economist Richard Thaler has been promoting this idea for years and it is likely to help more people save more for retirement.
As is its wont, Congress has given a friendly-sounding name to an act that contains many complicated and taxpayer un-friendly provisions. Rolled into the 2020 spending bill, the Setting Every Community Up for Retirement Enhancement Act avoided the political theater of a government shutdown, provided many tax breaks lobbied for by special interest groups and made retirement planning more complicated. This is an election year and I encourage each of you to find out where every candidate stands on issues that are important to you, which might include our growing national debt.