Retirement is an inevitable journey that everyone has to embark upon at some point in their life. Though planning for retirement may seem easy, various changes in government norms can present challenges for retirees. Recently, the SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed, which has changed the way people see retirement and education planning. The provisions of the SECURE Act are implied on IRAs, retirement plans and on their distributions and contributions. There have been modifications to Traditional and Roth IRAs and some new rules have been added to the 529 scheme as well. Let’s take a quick look at these turn by turn.
From now on, the penalty for early distributions from retirement accounts which used to be 10% will have a new exemption. There will be no penalty for distributions that are less than or equal to $5,000. This will be applicable if the distribution is made within a year of the date on which the child was born or legally adopted. The limit is for each child born or adopted below the age of 18. It also applies to a child who is unable to support themselves mentally or physically. In the case of married couples, each partner is allowed to take this distribution amount individually, summing up to a total of $10,000.If you plan on putting the money back into the account, the contribution will be turned into a direct trustee to trustee transfer. In other words, such contributions would not be counted against the usual limit for the year. The distribution will remain non-taxable and the contribution will be non-deductible. However, one drawback is that the contributions may be available after a long period of time.
For individuals under the age of 59, withdrawal rules will allow a maximum limit of $5,000 for birth or adoption of a child. These withdrawals will also be completely penalty-free. For graduate students falling in the same age limit, the stipend and non-tuition income will be turned into earned income which will allow more contributions towards the IRAs.
Retirees nearing the age of 70 or who are 70 years and 6 months old can wait till the age of 72 to avail maximum retirement distribution. If you are born on June 30, 1949, you can begin making distributions when you are 72 years old. If you are born before that, you will have to make distributions at the age of 70 years and 6 months.
For individuals above 70 years and 6 months of age, there is no age limitation for contributions. This is altered from the previous limitation of 70 years and 6 months. From the year 2020, any working individual can make contributions to their IRA without any age restrictions.
Under this section, the required minimum rules for distributions of accounts inherited before 12/31/2019 will not be applicable to any change and early RMD guidelines will follow as before. For the ones who have inherited an IRA after this date, the stretching out of the account will not be pertinent anymore. This means that if you have inherited the account after the given date, you won’t be able to stretch out the distributions over your life expectancy. This was allowed until now with special spouse guidelines in place. Also, the qualified trust that could stretch out the distributions will not be valid anymore. Instead, a new 10-year rule comes into place. This rule will allow a spouse to stretch out the distributions in certain circumstances.
Within the 529 Education Savings Plan, various entities will be included in the qualified higher education expenses category. These are supplies, books, fees, and resources used for apprenticeship programs. There is a standard limit of $10,000 that can be utilized for paying loans for students. There is also an added $10,000 limit to be used for any type of student loan associated with the sibling of the beneficiary. You must note that if you are using the distribution from a 529 Education Plan to repay a loan interest, the same cannot be included when you apply for student loan interest deduction.
The tax-favoring 529 plans were earlier used only to pay for college expenses while saving interests. The addition of loan payment feature comes up as a key advantage of the SECURE Act. This means that the changed norms have expanded to the number of ways in which 529 funds can be used. As described, there is a total of $20,000 limit that can be withdrawn without any penalty and can be used to pay for student loans.
Allowance of various types of uses of 529 funds also highlights the key aspect of the act. By using the funds for apprenticeships, tutors will now have ease in paying for expenses related to on-the-job training and education. However, to qualify for this apprenticeship plan, one needs to be a registered member of the Labor Department.
The SECURE Act is a rewarding surprise from the government and consists of various other changes crafted towards the benefit of the retirees. The 529 and Roth IRA amendments definitely stand out but the plan also paves the way to better planning, strategic investment, and a secure future for children.
Do you wish to get a detailed analysis of the latest SECURE Act? Know about all the changes by discussing it with financial advisors.
Consulting a professional can help you set yourself in the right direction from the beginning of the decade. Reach out to financial advisors for help on retirement planning for the 2020s.
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