By Brittany N. Cox,
Associate Advisor at Nestlerode & Loy, Inc.
It’s no surprise that the world around us is changing at a rapid pace, and according to Money.com, more than two-thirds of Americans want to start 2020 with a better financial footing. As we turn the page to a new year and new decade, I thought we should discuss some of the financial changes to be aware of for 2020.
You have probably heard or read about the SECURE Act that went into effect on Jan. 1. The SECURE Act stands for “Setting Every Community Up for Retirement Enhancement,” and the legislation aims to secure better retirement for individuals across the U.S.
One of the biggest changes is the extended period for retirement savers to let their IRA accounts grow. Previously, once an individual reached age 70½, they had to begin taking a required minimum distribution (RMD) from their retirement savings account. Now, qualified account holders can wait until age 72 to start withdrawing funds. This also allows workers over age 70½ to continue their contributions.
RMDs are also changed for the non-spouse beneficiaries of an IRA. Previously, beneficiaries who inherited a qualified account from someone other than their husband or wife could withdraw the RMD over the span of their lives. The new act requires beneficiaries to withdraw all the assets from the inherited account within 10 years. There are no RMDs, but the account must be withdrawn after the 10th year. This could be a burden to some as it will increase their taxable income.
The SECURE Act gives more options for small business retirement plans. It allows employers to pool their plans together into a multiple-employer plan. When the legislators first rolled out this option, it had requirements for the companies to be in the same industry and turned many employers away due to the fact that if one company in the pool was a “bad egg” and didn’t meet the requirements, the entire plan failed. The new act removes those factors allowing companies from different industries to band together without the common characteristic rule. Also, to encourage auto enrollment into employer plans, the act offers a tax credit to businesses who start a 401(k) plan or Simple IRA with an auto-enrollment feature. Since people are more likely to stay in a plan than initiate the process of enrolling, this helps employees start saving and save more.
Another change the act makes is allowing long-term part-time workers to participate in employer retirement plans. The old rule allowed employers to limit the plan to employees who work at least 1,000 hours before they could participate. That threshold has been lowered to 500 hours. This will help those who work part-time and partially retired people who would like to continue working to be able to put more away for their retirement.
The SECURE Act also encourages employers with retirement savings plans to let employees convert their savings into guaranteed lifetime income, through annuities. Employers will be protected from being sued if the insurer they choose to make annuity payments doesn’t pay claims in the future. It also requires the 401(k) statements of annuity holders to provide detail on how much income their savings is expected to produce.
We previously discussed that 529 savings can now be used to fund primary and secondary educational costs. 529 rules have now been expanded further to allow families to use their college savings plans repay up to $10,000 in student loans. Since there are no time limits imposed on 529 plans, the student may keep contributing to a 529 plan throughout college or after graduation and use any leftover funds to repay student loans tax-free.
In addition to the SECURE Act, the IRS also made some changes for 2020. They have raised the cap on 401(k) contributions to $19,500 from it’s previous $19,000 limit. The catch-up contribution for those age 50 and older also increased by $500 to $6,500. The amount you can contribute to your traditional IRA or Roth IRA stays the same at $6,000 with a $1,000 catch up contribution for those age 50 or older.
Of course, the beginning of a new year, and decade, poses a great time to review your allocations, contributions and other financial information. With the ever-changing world and rules on your finances, you should meet with your advisor and accountant to be sure you are maximizing your financial opportunities going forward. I’ve also taken the time in the new year to change my passwords on my financial accounts. Since cyber attacks are becoming more and more of an issue, it’s important to change up your passwords to keep your information secure. Use a different password than you have used in the past and use a different password for each of your online accounts.