I am going to take this opportunity to say thank you to our Congresswomen and Congressmen.  It’s because of them that they tend to make our (and many others) profession vital.  They prove to us, yet again, that no ‘financial plan’ is safe.  This is why Dan and I stress to our clients that any financial plan we create will be wrong.  

Hmmmm, maybe I should use a different word.  They will be revamped over and over again.  

This month Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement).  What I’d like to know is whose job is it to come up with these crazy acronyms!?!  Quite impressive.  

Regardless, the passing of the SECURE Act creates changes that will likely affect all of our readers in some way.  We wanted to take this opportunity to highlight some of the changes that may affect the two of you.  

Inheritances

If you inherit retirement (or qualified) assets from someone other than your spouse in 2020 and beyond, you will now *only* have 10 years to deplete that account.  I use the word *only* because previously, you could stretch those dollars over the course of your lifetime.  That stretch was beneficial for those who wanted to take distributions in years where their income would be lower (and taxes would be lower, too).  That option is no longer available.  My suggestion? Quit your jobs at the end of the year (reducing income taxes), start planning a years worth of travel, and take a distribution from your inheritance to pay for your hiatus.  Just kidding…. Sort of  :).

$5,000 Birth or Adoption Distribution

Children are expensive.  That’s not new.  What is new is a resource to help pay for those little rascals.  If you take an early distribution from a retirement plan, you will have to pay a penalty of 10% (plus federal/state tax for tax-deferred retirement plans).  However, Sec 113 allows for an aggregate distribution of $5,000 for a qualified birth or adoption.  The distribution would need to occur within one year of birth or the adoption becoming final for the child under the age of 18.  A few things to note with this:

1. Each individual parent has the ability to take a distribution for a child.  Therefore, for one child, there could be a total distribution of $10,000 from qualified assets, $5,000 from each parent.
2. This is also on a per child basis (aka - no limits people!).  If you have twins in the same year, you can take two $5,000 distributions (for the 2 kiddos) from the same account in the same year.
3. You may have the ability to ‘pay back’ your distribution.  This ‘pay back’ would be a contribution into the account that equals the same Birth/Adoption distribution you previously took out.  This contribution can be made on top of the annual contribution limit you already have into that retirement account.  Cool!

Kiddie Tax Reverts Back

This one is a bit tricky.  Income subject to Kiddie Tax is back to being taxed at the parents’ marginal tax rate.  Although the change is effective for 2020, taxpayers can actually elect to apply the previous Kiddie Tax rules (using trust tax rates) to the current 2019 AND 2018 tax year.  In order to change what was filed in 2018, you would have to file an amended return.  It’s important to have a conversation with your financial planner and accountant to determine the best strategy for your children's unearned income in 2018 and 2019. 

Qualified Education Expenses for 529 Plan Have Expanded 

Two years ago, the Tax Cuts and Jobs Act expanded the use of 529 Plans to up to $10,000 annually on K - 12 expenses.  We have now been granted even more access.  The SECURE ACT provides the following additional qualified expenses from 529 Plans:

1. Expenses for Apprenticeship Programs that include fees, books, supplies, and required equipment as long as the program is appropriately registered and certified with the Department of Labor.  
2. Second, and likely more applicable to most, we can now use 529 Plan dollars to make “Qualified Education Loan Repayments.”  Individuals will have a $10,000 lifetime limit per-person.  In addition, $10,000 may be distributed as a qualified loan repayment to pay down outstanding student loan debt for each of the 529 Plan beneficiary’s siblings!  This change is effective retroactive to the beginning of 2019.

Taxable Non-Tuition Fellowship and Stipend Income

We live in Rochester, MN, which is home to the Mayo Clinic.  So doc, this one’s for you!  For those who receive taxable income for a fellowship or stipend, you can now use those dollars to make a contribution to an IRA!  

Tax credit for small businesses that establish a 401(k), 403(b), SIMPLE IRA, or SEP IRA

Currently, if you are a small business and you establish a retirement plan you can receive a credit of $500 for up to three years for costs related to establishing a retirement plan.  A small business is defined by having no more than 100 employees who receive at least $5,000 of compensation from the employer.  Effective 2020, your small business will receive a credit (for up to three years) in the greater amount of:

1. $500; OR
2. The lesser of the following:
3. $5,000
4. $250 x # of non-highly compensated employees eligible to participate in the plan

Additional Retirement Plan Changes

1. Tax Credit for the adoption of Auto-Enrollment for participants in 401(k) plans for small businesses:
2. $500 credit.
3. Beginning in 2020 and can be claimed in the year the auto-enrollment option is first adopted (not when the plan was created) by the plan as well as the two following years.
4. Maximum contribution for 401(k) automatic enrollment increased to 15%:  
5. Automatic Enrollment has been shown to increase participation in employer plans.  Richard Thaler explains this well in his book, Nudge.  Prior to this legislation, the maximum percentage an employer can default for automatic enrollment was 10%.  Beginning in 2020, employers can bump that baby up all the way to 15%.  I’m a big fan of these two auto-enrollment features.
6. Long Term, part-time employees who work at least 500 hours in three consecutive years will be eligible to participate in their employers 401(k) plan:
7. Prior to this revision, employers could exclude part time employees from participating in a 401(k) plan if they have not worked at least 1,000 hours/year (that’s about 20 hours/week).
8. This law doesn’t begin until 2021.  And get this, the SECURE Act doesn’t require employers to start the three year ‘counting’ of a 500 hours/year employee until 2021.  So the earliest an employee would be eligible to participate in the 401(k) plan would be 2024… a lot can change between now and then.  

Deductions: Mortgage Insurance Premiums and Qualified Tuition and Related Expenses

It’s back with a vengeance!  These two tax benefits for individuals are here again and retroactive to 2018.  These two deductions have only been made effective through 2020 (so it’s very possible it could go away… again… and come back...again…)

Required Minimum Distribution (RMD) Age Change

If you defer taxes in a retirement account (like a traditional IRA), the IRS eventually requires you to start taking distributions from that account.  For most working professionals, whether you are just entering or you are retiring in a few days, your expected age to start taking these mandatory distributions was 70.5.  However, for those who turn 70.5 in 2020 or later they now are not required to take distributions until age 72! 

There is much more to the SECURE Act than what we discussed above.  In order to see how all of the changes affect your specific situation, speak to one of us!  Also, I have to give a huge shout out to the Nerd’s Eye View blog where most of the information above was obtained.  Their team does an excellent job of deciphering how new legislation affects financial professionals and individuals.  

In the last 10 years, we’ve seen a variety of changes in Tax Legislation; SECURE Act, Tax Cuts and Jobs Act of 2017, Protecting Americans from Tax Hikes Act of 2015 (PATH), and the American Taxpayer Relief Act of 2012 to name a few.  Our goal is to keep you informed on the major changes that occur and provide you guidance with how best to navigate going forward. 

Thank you for reading!  Have a wonderful and safe New Year celebration.

- Natalie

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.