Congress 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.
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.
On the plus side, the SECURE Act includes several provisions designed to help American workers and retirees.
The SECURE Act also helps employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:
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.
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
– 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.
The following out-of-pocket costs for Original Medicare Part A and Part B apply in 2020:
Each 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.
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
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.”
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
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