Financial Literacy

30
Dec

SECURE Act To Take Effect

SECURE ActCongress enacted a $1.4 trillion spending package on December 20, 2019. The package includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act overwhelmingly passed the House of Representatives in the spring of 2019 but stalled in the Senate. The SECURE Act is the most sweeping set of changes to retirement legislation in more than a decade.

 

Many of the provisions offer enhanced opportunities for individuals and small business owners. But there is one big drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will want to revisit their estate plans to prevent their heirs from potentially facing high tax bills.

 

All provisions take effect on or after January 1, 2020, unless otherwise noted.

 

Elimination of the “stretch IRA”

One change requiring urgent attention is the elimination of the “Stretch IRA.” Suppose a non-spouse beneficiary inherited traditional IRA or retirement plan assets. The “Stretch IRA” let him or her spread required distributions and their taxes over their lifetimes.

The new law now requires the beneficiary to liquidate the inherited account within ten years of the account owner’s death. The beneficiary must be 10 years younger than the account owner for this rule to apply. Exceptions apply if the beneficiary is a spouse, disabled or chronically ill, or a minor child. This shorter distribution period could result in unanticipated tax bills for beneficiaries. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.

 

Traditional IRA owners may want to also revisit how IRA dollars fit into their estate planning strategy. For example, it may make sense to consider the implications of converting traditional IRA funds to Roth IRAs. Beneficiaries inherit Roth IRAs tax free. Roth IRA conversions are taxable events. But investors who spread out a series of conversions over several years may enjoy the lower income tax rates expiring in 2026.

Benefits to individuals

On the plus side, the SECURE Act includes several provisions designed to help American workers and retirees.

 

  • People who choose to work beyond traditional retirement age will be able to contribute to traditional IRAs beyond age 70½. Earlier laws prevented such contributions.
  • Retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs and retirement plans by April 1 following the year in which they turn 70½. The new law generally requires RMDs to begin by April 1 following the year in which they turn age 72.
  • Employers generally must allow part-time workers age 21 and older who log at least 500 hours in three consecutive years generally to take part in company retirement plans offering a qualified cash or deferred arrangement. Before, the rule was 1,000 hours and one year of service. (The new rule applies to plan years beginning on or after January 1, 2021.)
  • Workers will receive annual statements from their employers estimating how much their retirement plan assets are worth expressed as monthly income received over a lifetime. This should help workers better gauge progress toward meeting their retirement-income goals.
  • New laws make it easier for employers to offer lifetime income annuities within retirement plans. Such products can help workers plan for a predictable stream of income in retirement. Also, employees can transfer lifetime income investments or annuities held within a plan that stops those investments to another retirement plan. The Direct Transfer avoids potential surrender charges and fees that may otherwise apply.

 

  • Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child. (Regular income taxes will still apply, so new parents may want to be cautious.)
  • Taxpayers with high medical bills may be able to deduct unreimbursed expenses that exceed 7.5% (in 2019 and 2020) of their adjusted gross income. Also, individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover expenses that exceed this threshold. Regular income taxes will apply. The threshold returns to 10% in 2021.
  • 529 account owners can now use these accounts to repay student loans. The limit is $10,000 over the account owner’s lifetime. 529 funds may also now pay for costs associated with registered apprenticeships.

Benefits to Employers

The SECURE Act also helps employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:

 

  • The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows employers to take a credit equal to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of non-highly compensated eligible employees or (b) $5,000. The credit applies for up to three years. The earlier maximum credit amount allowed was 50% of startup costs up to a maximum of $1,000 (i.e., a maximum credit of $500).
  • A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. The credit applies for three years.
  • Employers may exclude part-time employees for nondiscrimination testing purposes of retirement plans.
  • Employers now have easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, offer economies of scale. They allow small employers access to pricing and other benefits often reserved for large organizations. Under old rule, groups of small businesses had to be affiliated somehow to join a MEP.)The legislation also provides that the failure of one employer in a MEP to meet plan requirements will not cause others to fail, and that plan assets in the failed plan will transfer to another. (This rule is effective for plan years beginning on or after January 1, 2021.)
  • Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15% of salary. The prior ceiling was 10%.

 

9
Dec

What Will You Pay In Medicare Premiums In 2020?

2020 Calendar

Medicare premiums, deductibles, and coinsurance amounts change annually. Here’s a look at some of the costs that will apply in 2020 if you enrolled in Original Medicare Part A and Part B.

Medicare Part B premiums

According to the Centers for Medicare & Medicaid Services (CMS), most people with Medicare who receive Social Security benefits will pay the standard monthly Part B premium of $144.60 in 2020.

You may pay less than the standard Part B premium if you meet the following conditions:

– Medicare deducts premiums from your Social Security benefits

and

– The cost-of-living increase in your benefit payments for 2020 will not be enough to cover the Medicare Part B increase.

People with higher incomes may pay more than the standard premium. If your 2018 federal income tax return shows a modified adjusted gross income (MAGI) above a certain amount, a higher premium will apply. You’ll pay the standard premium amount and an Income Related Monthly Adjustment Amount (IRMAA). IRMAA is an extra charge added to your premium, as shown in the following table.

Medicare Premiums Table

Other Medicare costs

The following out-of-pocket costs for Original Medicare Part A and Part B apply in 2020:

 

  • Part A deductible for inpatient hospitalization: $1,408 per benefit period
  • Part A premium for those who need to buy coverage: up to $458 per month (most people don’t pay a premium for Medicare Part A)
  • Part A coinsurance: $352 per day for days 61 through 90, and $704 per “lifetime reserve day” after day 90 (up to a 60-day lifetime maximum)
  • Part B annual deductible: $198
  • Skilled nursing facility coinsurance: $176 for days 21 through 100 (for each benefit period)

For more information on costs and benefits related to Social Security and Medicare, visit ssa.gov and medicare.gov.

2
Dec

College Cost Data for 2019-2020 School Year

college costsEach year, the College Board releases its annual Trends in College Pricing report that highlights current college costs and trends. While costs can vary significantly depending on the region and college, the College Board publishes average cost figures, which are based on a survey of nearly 4,000 colleges across the country.

Following are cost highlights for the 2019-2020 academic year.1 Note that “total cost of attendance” figures include direct billed costs for tuition, fees, room, and board, plus a sum for indirect costs that includes books, transportation, and personal expenses, which will vary by student.

Public college costs (in-state students)

  • Tuition and fees increased 2.3% to $10,440
  • Room and board increased 2.9% to $11,510
  • Total cost of attendance: $26,590

Public college costs (out-of-state students)

  • Tuition and fees increased 2.4% to $26,820
  • Room and board increased 2.9% to $11,510 (same as in-state)
  • Total cost of attendance: $42,970

Private college costs

  • Tuition and fees increased 3.4% to $36,880
  • Room and board increased 3.0% to $12,990
  • Total cost of attendance: $53,980

Reminder on FAFSA timeline

Families were able to begin filing the 2020-2021 FAFSA (Free Application for Federal Student Aid) on October 1, 2019. The earlier timeline was instituted a few years ago to better align the financial aid process with the college admissions process and to give parents information about their child’s aid eligibility earlier in the process.

The 2020-2021 FAFSA relies on income information from your 2018 federal income tax return and current asset information. Your income is the biggest factor in determining financial aid eligibility. A detailed analysis of the federal aid formula is beyond the scope of this article, but generally here’s how it works:2

  • Parent income is counted up to 47% (income equals adjusted gross income, plus untaxed income/benefits minus certain deductions)
  • Student income is counted at 50% over a certain amount ($6,840 for the 2020-2021 academic year)
  • Parent assets are counted at 5.64% (home equity, retirement accounts, cash value life insurance, and annuities are excluded)
  • Student assets are counted at 20%

The result is a figure known as your expected family contribution, or EFC. Your EFC remains constant, no matter which college your child attends. Your EFC is not the same as your child’s financial need. To calculate financial need, subtract your EFC from the cost at a specific college. Because costs vary at each college, your child’s financial need will vary depending on the cost of a particular college.

One thing to keep in mind: Just because your child has financial need doesn’t automatically mean that colleges will meet 100% of that need. In fact, it’s not uncommon for colleges to meet only a portion of it. In this case, you’ll have to make up the gap, in addition to paying your EFC.

To get an estimate ahead of time of what your out-of-pocket costs might be at various colleges, run the net price calculator on each college’s website. A net price calculator asks for income, asset, and general family information and provides an estimate of grant aid at that particular college. The cost of the school minus this grant aid equals your estimated net price, hence the name “net price calculator.”

Reduced asset protection allowance

Behind the scenes, a stealth change in the FAFSA has been quietly and negatively impacting families. The asset protection allowance, which lets parents shield a certain amount of their assets from consideration (in addition to the assets listed above that are already shielded), has been steadily declining for years, resulting in higher EFCs. Fifteen years ago, the asset protection allowance for a 48-year-old married parent with a child about to enter college was $40,500. For 2020-2021, that same allowance is $6,000, resulting in a $1,946 decrease in a student’s aid eligibility ($40,500 – $6,000 x 5.64%).3

Higher student debt

Student loan debt continues to grow and student debt is now the second-highest consumer debt category, ahead of both credit cards and auto loans and behind only mortgage debt.4 About 65% of U.S. college seniors who graduated in 2018 had student debt, owing an average of $29,200.5 And it’s not just students who are borrowing. Parents are borrowing, too. There are approximately 15 million student loan borrowers age 40 and older, and this demographic accounts for almost 40% of all student loan debt.6

1) College Board, 2019
2-3) U.S. Department of Education, The EFC Formula, 2020-2021, 2005-2006
4) Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, August 2018
5) Institute for College Access & Success, Student Debt and the Class of 2018, September 2019
6) Federal Reserve Bank of New York, Student Loan Data and Demographics, September 2018