SECURE Act Creates Big Changes to Your Tax and Financial Planning
On December 20, 2019, the President and Congress passed into law the Further Consolidated Appropriations Act, 2020, including the SECURE Act of 2019. Short for Setting Every Community Up for Retirement Enhancement, the Act contains several provisions that are important to know when considering your tax and financial planning. Here is a short summary of some of the changes:
Required Minimum Distribution Age
One of these changes increases the age at which Required Minimum Distributions are required. The old law generally required an individual to start making distributions from their retirement accounts after they turned age 70-1/2. The new law increases that to age 72. Only those who turn 70-1/2 in 2020 or later may wait until age 72 to start taking their RMDs.
Repeal of Age Limitation for Contributions to IRAs
In the past, you were not allowed to contribute to an IRA if you were over age 70-1/2. The SECURE Act repeals this rule and there is no longer a maximum age. Keep in mind you still must have earned income to be able to contribute to an IRA. If you were over age 70-1/2 in 2019, you may not contribute for 2019. The amount of the contribution limits have not changed.
The new law expands the type of expenses that can qualify for payment from a 529 plan. Under the SECURE Act, 529 plan funds can now be used for qualified apprenticeship programs and to repay up to $10,000 in qualified student loans.
One of the biggest changes in the SECURE Act that will affect financial planning is the changes to the IRA distribution rules. In general, a non-spouse inheritor of an IRA can no longer stretch the required minimum distributions out over their lifetimes. The new law requires that the IRA be fully distributed within 10 years of the death of the original IRA owner.
This change will necessitate review of current financial plans and estate plans to determine whether the strategy should be changed. Alternative strategies such as ROTH IRA conversions, trusts, life insurance policies, etc. should be considered to minimize the new tax burden placed on inherited IRAs.
In order to analyze this issue, it will be necessary to review financial plans and projections to determine the effect of this change.
Previously under the old law, the hurdle for being able to deduct your medical expenses was scheduled to be 10% of adjusted gross income (“AGI”). With the passage of this new law, the hurdle has been reduced to 7.5% of AGI. This change will allow people to deduct more in medical expenses. Arizona still allows a full itemized deduction for medical expenses.
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