President Trump signed the Setting Every Community Up for Retirement (SECURE) Enhancement Act into law on December 20, 2019. Well, the good news is that this is the most considerable act since the Pension Protection Act enforced by the government in 2006.
This law is effective fJanuary 1, 2020. According to the website of the Thrift Savings Plan (TSP), they have already started calculating how this new act will affect TSPP.
Let’s discuss the six notable retirement changes of the SECURE Act effective from January 1, 2020:
1. No age limit for employees who want to contribute to the traditional IRA.
As per the old law, employees aged 70 ½ could not contribute to the IRA.
Key Benefits
· The benefit of Back-Door Roth IRA—this will help people who find income too high to qualify for a Roth IRA contribution now; they can contribute to an IRA and convert the IRA to a Roth IRA. Before the new amendment, when an IRA owner turned 70 ½, he or she was declared ineligible to contribute to an IRA. From January 1, 2020, the old law will change, and people over age 70 ½ would be eligible to contribute.
· A non-working spouse would be eligible for IRA contribution, and this doubles the contribution for a couple.
Notes
The new law eliminates the age limit issue but earned income is still required to contribute to IRA, Roth IRA, or spousal IRA contribution.
2. The Required Minimum Distributions (RMDs) age increased from 70 ½ to 72 for all retirement accounts
This law applies only to those employees who are not 70 ½ by December 31, 2019.
Key Benefits
· This gives more time to do Roth conversions before RMDs start.
· For long-term living Americans, this will help their savings last longer.
· No change in age limit for a Qualified Charitable Distribution (QCD), which remains the same at age 70 ½.
Notes
· Employees not serving the federal government will continue taking RMDs from a Roth TSP.
· Once RMDs have begun, they cannot be converted to a Roth IRA.
3. Distribution is taxable, but withdrawal is penalty-free for birth or adoption
According to the old law, no exception was given on withdrawal under age 59 ½.
Key Benefits: This applies to:
· All contributory retirement plans.
· Any kind of distribution from the retirement account within one year from the DOB or adoption.
· Repayments to the plan can be repaid and will be considered as an eligible rollover.
Notes:
· The total limit is $5,000 for lifetime distribution and is not for a year.
· This applies only to children who are 18 years old, or physically or mentally disabled and dependents.
· It is advised to use retirement accounts only as a last option for any use.
4. Removes “Stretch IRA” and inherited IRAs making it mandatory for non-spouse beneficiaries to be withdrawn with paid taxes within ten years’ time
This doesn’t include the surviving spouse, minor children, grandchildren up to majority age or age 26 in the case of disabled individuals, and the chronically ill as per law and beneficiaries ten years or younger than the IRA owner.
Notes:
· Will not affect participants who inherited an IRA in 2019 or prior years.
· The SECURE Act allows minimum distribution at the end of the tenth year.
What actions need to be taken?
If you have a trust in your retirement account as your beneficiary, then you must review it or get rid of it.
5. The new law opens opportunities for employer-based plans and offer annuities by providing liability protection
This plan is best for employer liability protection.
Note:
· As per the old law, TSP provides an immediate annuity through MetLife to provide lifetime income. The main disadvantage of this law is that you lock yourself into today’s low-interest rate. This decision is irrevocable. In case of emergency, if you need funds, you won’t feel lucky enough.
· There are so many plans offering lifetime benefits. TSP should or shouldn’t look at other types of annuities?
6. The new changes allow non-tuition income and stipend payments, which are taxable, to be dealt with as the compensation to qualify for effective contribution to an IRA or Roth IRA
So many options and opportunities are available with the new retirement changes.
Five key Solutions and Opportunities knocking on your door:
1) Beneficiaries’ re-evaluation
· In the case of tax deferral, Spousal rollovers can be more beneficial.
· Any trust listed as a beneficiary should be reviewed immediately.
2) Manages Tax Bracket
· Increases low tax brackets.
· If inclined to charity, qualify for Charitable Distributions.
3) Analyzes Roth Conversions
· The lower rates under the Tax Cuts and Jobs Act are expected to setback after 2025.
· Do you think paying the tax is worth it? It only lasts for ten years after death.
4) Use Life Insurance as an estate and tax planning medium
· Benefits of a ‘stretch IRA’ and IRA trusts can be replaced.
· Beneficiaries pay fewer taxes.
5) Skip Trust Tax Rates
· For now, the highest trust tax rate is 37% for income over $12,950.
