It seems that every year Congress gives us an impossible task. I am not talking about politics. I am talking about the newest tax law changes that will become effective next year. Major tax law changes that most people are unaware of seem to come out right around this time every year. It reminds me of our impossible family tradition. Every year around New Year’s Eve my family tries the impossible. We have a tradition where we reflect on the past year and we set our goals for the New Year. Now you might ask why this is impossible. The simple answer is that focusing on the past and thinking about the future at the same time are impossible to do without missing a single step. If you live in the past, it is really hard to think about the future. You need a middle ground, a safe place. This is what we all call the present.
So in order to comfortably reflect on the past year, first find a way to ground yourself. Everyone is different, back when I was training for half marathons, I would find this quiet place while running. It is the place where all you do is observe where you are and not react. It is the calm center in the storm. Some people find it sitting quietly and letting their minds relax. Everyone is different. I find that only from this place of calm, can I really reflect on the lessons learned from the past. Only from this place of calm can I reflect and make good decisions of the future. From this place, I am reflecting on the changes to the tax law and how they will affect you.
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This new law does several things that will affect your ability to save money for retirement and influence how you use the funds over time. The biggest changes are characterized as follows:
The SECURE Act pushes the age that triggers RMDs from 70½ to 72, which means you can let your retirement funds grow an extra 1½ years before tapping into them. That can result in a significant boost to overall retirement savings for many seniors.The amendments made by this section shall apply to plan years beginning after December 31, 2020. So for 2020, the RMDs remain the same.
The SECURE Act also eliminates the maximum age for traditional IRA contributions, which was previously capped at 70.5 years old.
The SECURE Act allows Annuities inside of 401(k) plans. This could be good as it would be a way for employer to offer guaranteed income for life for employees. In the past, there are plans that have annuities inside of 401(k)s, but there were only a limited number of annuity companies creating product. Now, we could see new improved products entering the area.
Most Stretch IRAs are no longer allowed.The SECURE Act requires non-spouse beneficiaries of IRAs withdraw all assets of an inherited account within 10 years. There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year. In the past, non-spouse beneficiaries, (child or grandchild), could spread your IRA after you pass away, for their whole lifetime, (30 to 50 additional years) paying minimal taxes on your IRA. This change can be problematic for some beneficiaries, especially if they are in their peak earning years. Major tax planning will be required to reduce a non-spouses IRA beneficiary tax burden.
Most Revocable ‘Living’ Trusts need to be updated. The Secure Act will change a lot of plans to protect the next generation from both taxes and themselves on inherited IRAs. As a practicing estate planning attorney, I am in the process of reviewing and revising my language of my Trusts. Over the next several months, anyone who has an IRA that they plan to leave for a non-spouse, needs to sit down and review their Revocable Trust language.
The Good and the Bad.
The SECURE Act allows access to multiple employer plans for small businesses. Most companies do not offer 401(k) or any retirement plan to employees. The SECURE Act is attempting to reduce the cost of plans for employers. The Act will allow multiple companies to put ‘plans together’. In the past, any new plan creates confusion for existing employers, SEP vs SIMPLE vs Solo 401(k) discussions for small businesses.
The SECURE Act allows part time employees to join 401(k) plans, this could create confusion and fear on the part of an employer of which ’employee’ to include’ or it might encourage part time employees to save money for retirement.
The SECURE Act also provides a tax credit for employers to set up a retirement plan that has an auto enroll feature, which requires all employees be part of a retirement plan.
There are a lot more changes that are being reviewed and discussed. The biggest concern of mine is the removal of the stretch IRA. The financial media is discussing the SECURE Act as if it will allow most Americans to place more money into retirement plans. Like any other impossible task, the SECURE Act has elements of good, bad, and unknown. The only way I find to work through changes is to stay in the present.
We are blessed with an amazing world, and caring people. I wish everyone, joy and happiness this holiday season, and make it a great New Year.
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