The Secure Act became law on Jan. 1, and some provisions are becoming clearer. This law was passed because of the widely known lack of retirement planning by many Americans.
Baby boomers are the first generation for which many workers are responsible for their own retirement. Many will not receive a pension. While some have done a great job saving in 401(k)s and Individual Retirement Accounts, many have not saved nearly enough.
One provision moves the age to begin required minimum distributions to 72. Under the old law, it was 70½. The new law provides an extra year and a half and ends some confusion of a half-year.
This is a good change because it gives you more time if you do not need the money yet. When one spouse dies, income goes down and expenses stay about the same. Taxes, however, go up dramatically. This is because you get only half of the free money and hit tax brackets twice as quickly. The later RMD age makes more money available when needed.
Remember, you can always take out more, just not less. The 50% penalty rate remains in effect. Everyone must have RMDs taken out by April 1 of the year following age 72, and every year after. People who were already 70½ by Dec. 31, 2019, remain under the old rules.
Another change is you are allowed to continue to contribute to an IRA after 70½ if you have earned income. Under the old rule, contributions had to stop at that age. You will have to plan how to take your RMDs if you are still contributing at this latter age.
The law has been changed to encourage more annuity options in 401(k)s and other retirement plans. These guarantee options that often were not included in the past. Really, a pension and Social Security are annuities. They are the only products that can guarantee lifetime income.
The Secure Act has added an exception for people under 59½. Previously, if they took money out of a qualified account before this age, they had to pay a 10% penalty in addition to income taxes. Under the new law, a married couple can each take a $5,000 distribution penalty-free from their retirement accounts following the birth or adoption of a child. It can be repaid at a later date.
Remember while this may help some people’s cash flow, retirement accounts are primarily for retirement.
The Secure Act does away with a tax change Congress made in the Tax Cuts and Jobs Act. The “Kiddie Tax” is now like before, when young children’s unearned income will be taxed at their parent’s top marginal rate. This provision is effective for tax years after Dec. 31, 2019, but you can elect to have it retroactively for 2018 and 2019.
The Secure Act and last year’s Trump tax cuts make it imperative that tax planning is part of any retirement plan. Make sure that yours take these in to consideration.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
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