Our government has been busy! In case you missed it, on December 20th, 2019 the President signed a new budget bill into law that has received lots of attention in the media, and I want to summarize the major items that I believe may have a direct impact on you and your family (I’m all about financial education here!).
There are some really good law changes in this bill and some undesirable changes so you’ll see my point of view (POV) woven throughout as well. I’ve organized the changes by topic so you only need to read the sections that apply to you.
We are all awaiting further guidance from the IRS on many of the detailed factors in this bill, but the major effects are listed below:
RETIREMENT PLANNING
IRA Age Limit Repealed - Starting in 2020, there is no longer an age limit to who can deposit money into an IRA if they have earned income such as a wage or self-employment. There are some other rules that may apply, but the old rule prohibited contributions during or after you reached age 70.5. {Roths have always been exempt from the age rule.}
My POV: This is awesome! People are living longer, pensions are going away and people are working longer so I like this change.
IRA Mandatory Age to Withdrawal Increased - Beginning in 2020, the mandatory age to begin distributions from your IRA has been raised to age 72 from the old, confusing age 70½.
My POV: Again, awesome. Same as above, but wish they extended it a little more to, say, age 75.
Inherited IRA/Defined Contribution Distribution Rule Change - This has been a big deal in the news. It used to be if you inherited an IRA/401(k) as a non-spouse you could withdraw from it over your own life expectancy (taking a certain % each year), but now you have to withdraw from the inherited account over 10 years. For instance, if you expect to inherit your grandparents’ or parents’ IRA, there will be some tax planning in those years to try to keep you from a higher tax bracket. Keep in mind that nothing has changed for a spouse and this does not affect situations where the IRA was inherited from someone who died before 2020. {Does not apply to spouse, minor children (until they hit 18), disabled beneficiaries, chronically ill beneficiaries or someone <10 years younger than deceased}
My POV: This change will now require careful planning when a non-spouse inherits a significantly high IRA. If you are prepared and plan adequately for these funds I don’t think this is so bad because hopefully you weren't even counting on the inheritance and it’s just a nice surprise.
IRA penalty withdrawal exemption for Birth or Legal Adoption - Up to $5,000 may be withdrawn from a retirement plan without penalty for the birth or legal adoption of a child (both mom & dad can use), for up to one year after birth or adoption. The amount withdrawn is still taxable, but can be redeposited without penalty. If redeposited within 60 days of withdrawal it is not even taxable.
My POV: This rule benefits someone who is in hardship, which is a great option to have, but if you have the funds to pay for birth or legal adoption my recommendation would be to avoid taking it out of your retirement.
Annuities allowed in 401(k) plans - With this law, employer-sponsored 401(k) plans can add annuities as investment options.
My POV: BUYER BEWARE. I’m not a fan of this. Annuities are insurance policies where you put your savings into an insurance vehicle that provides you income in retirement. They are extremely complicated and normally come with very high fees, surrender charges and don’t provide as much growth as other investment options. Growth is key when you are young and building up your retirement. I’m concerned the wrong people are going to purchase them because there isn’t much education out there about annuities (or investing in general). If you are young 20s-40s do not buy an annuity in your 401(k). Wait for your money to grow in the market without the high fees and if an annuity fits within your retirement plan then buy it when you near retirement with your investment growth.
COLLEGE AND CHILDREN CHANGES
529 Allowed for Student Loan Payments - This change now allows someone to take $10,000 in total during their lifetime from a 529 to repay student loans of the account beneficiary (or their siblings), without tax or penalty, as a qualified educational expense. Not sure what a 529 is? It’s a tax-advantaged savings account where parents/grandparents save and invest money for a child’s education costs (normally college)
My POV: My guess is you likely wouldn’t have student loans if you had funds in a 529, but that said, I’m always for any way to help the student loan problem in this country.
529 Allowed for Apprenticeships - This change means you may now use funds in a 529 tax-free to pay for an apprenticeship program registered and certified with Secretary of Labor
My POV: We need more people in trade professions. Plus, what if your child doesn’t want to go to college? Many plumbers and electricians earn great salaries and they don’t have student loans! This is great!
Repeal of Kiddie Tax - If a minor made more than the unearned income limit their income was taxed at the very high trust and estates tax rates. Now it goes back to being taxed at the parent’s tax rates.
My POV: Generally, I was not in favor of opening a UGMA/UTMA account, (an investment account for a minor) for my client’s kids because of the risk that the income from these accounts is taxed at the high trust & estate tax rates, but now I’m much more in favor of them with this change.
Tuition Deduction Brought Back - The tuition and fees deduction has been retroactively restored from 2018-2020. This allows a tax deduction up to $4,000 for qualified expenses if you are under the income thresholds.
My POV: Great, but take the American Opportunity Tax Credit and the Lifetime Learning Credit first as a credit will reduce your tax owed dollar for dollar where a deduction only decreases your income that is taxed (a % ). Credit > Deduction
SMALL BUSINESS OWNERS
Increased Tax Credits for Employee Retirement Plans (401(k)s)
Set-up Credit - Tax credit increased from $500 to $5,000 max (lesser of $250 x # of eligible employees or $5k)
Adopting Automatic Enrollment Credit- In addition to the set-up credit above, $500 tax credit for three years for plans that add auto-enrollment of new hires.
My POV: This is great! Historically, it used to be expensive for small business owners to create 401(k) plans, but the costs are decreasing AND there is now an even greater incentive with a higher tax credit available! Having a 401(K) plan available to your employees is a wonderful benefit if you can swing it. And now it’s cheaper than ever.
Multiple Employer Plans - Allows small employers to join together to open 401(k) plans to share cost and responsibility
My POV: I’m curious to see how this develops. Need some time here to evaluate the ones that become available….
OTHER MISC. CHANGES TO NOTE
Smoking age raised to 21 - A new rule prohibiting the purchase of smoking or e-cigarette products (including vaping)
Increased failure to file penalty - Well, just file your tax return on time so you don’t have to find out! :)
The deduction for mortgage insurance premiums has been retroactively restored
The deduction for medical expenses has been restored to the lower threshold - 7.5% AGI
The credit for installing an electric car charger has been restored
I know this is a lot to digest, but I hope you found this to be a helpful summary of the law changes and now can navigate how it impacts you. Of course, if you want someone in your corner to help you when these types of law changes occur, schedule a free, 30-minute call with me today!
