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Weekly Market Digest: What You Need to Know About the SECURE Act

US Markets pushed towards a strong finish to 2019 this week, with only 2 more business days left in the year. Gold had a good week as well, while bond yields fell.

On Friday December 20th, the SECURE Act was signed into law, marking the second major tax legislation to be released in the past several years. We detail some of the highlights to investors below.
We wish all our readers a Happy and Healthy New Year!

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Weekly Returns

S&P 500: 3240 (0.6%)
FTSE All-World ex-US(VEU): (-0.2%)
US 10 Year Treasury Yield: 1.88% (-2.19%)
Gold: $1,511.1 (2.2%)
EUR/USD: 1.1180 (0.9%)

Major Events:

  • Monday – Boeing CEO Dennis Muilenburg stepped down with a $39 million severance package as Boeing’s board decided to separate from the CEO who oversaw the company through the Boeing 737 Max crisis.
  • Tuesday – Tesla stock closed above $425 a share.
  • Wednesday – The Markets were closed for the Christmas Holiday.
  • Thursday – Amazon announced record holiday sales in their typical, day after Christmas press release, despite other recent reports questioning the safety & quality of some products sold on the company’s website.
  • Friday –Spotify announced that it too will soon cease sales of political advertising on its platform, becoming the most recent tech giant to either outright avoid, or significantly limit political advertising dollars.

Our Take: The SECURE Act

Last week the ‘Setting Every Community Up for Retirement Enhancement’ (SECURE) Act was passed as part of H.R. 1865, with the law largely going into effect in the new year. There are some nice provisions in the act, which are likely overshadowed by dramatic changes to Inherited IRAs, and a heavily lobbied provision allowing greater access to annuities within 401k plans. Here’s what we think you should know:

Contributions to IRAs

As long as you have earned income (from work) you will be able to contribute to your IRA, regardless of age. Previously, you were prevented from doing this once attaining the age of 70.5. Additionally, the law expands the definition of earned income to include some wages paid to graduate students that were not previously considered eligible.
IRA Distributions:

Required Minimum Distributions

The RMD age is being moved from 70.5 to 72, but only for individuals who will reach age 70.5 in 2020. Those already taking their RMDs will need to continue to do so.

Inherited IRAs

Owners who inherited IRAs prior to January 1st 2020, will not be impacted. For those who inherited IRAs after this date, non-spouses will have the ability to ‘stretch’ the tax deferred or tax-free nature of the account (by slowly distributing the minimum required each year) significantly limited relative to the old rules. Specifically, most beneficiaries will generally have to completely deplete the inherited IRA within 10 years. Previously beneficiaries could typically expect to take distributions according to their own life expectancy, which was commonly more than a 10-year time period. There are some exceptions to this rule, including spouses, and minor/dependent children who inherit from a parent, to name a few of the existing exceptions. Particular care should be taken for any IRAs that list a Trust as a beneficiary as a result of these changes.

Adoption/Childbirth Provision

Individuals who have a ‘qualified birth or adoption’ will be able to take up to $5,000 from their IRA or other similar plan such as a 401k without the usual 10% penalty. The law also contains language stating that parents can repay themselves the amount taken for this reason at a later time (currently the timing is not specified). Specifics around timing and definitions follow: To take advantage of the $5,000 allowance, the distribution must be within the first year from the child’s date of birth, or 1 year from the legal adoption date. ‘Eligible adoptee’ means any individual (other than a child of the taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of self-support.

529 Accounts

In addition to using 529 accounts for up to $10,000 of pre-college education expenses per year(a provision that was a part of the 2018 tax law changes), investors can now use 529 accounts to pay up to $10,000 in ‘qualified’ student loans(this is not a per-annum figure), as well as towards expenses for certain apprenticeship programs. This change is retroactive to distributions made at any time in 2019. An acceptable apprenticeship program is defined as one that is registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act (29 U.S.C. 50).

Annuities in 401ks

While previously allowed, the law will change the ownership of fiduciary responsibility from an employer onto the insurance company selling the annuity. This in effect is expected to expand the availability of annuities within 401k plans, which are already tax advantaged vehicles. To us this is an example of successful lobbying from the financial industry to sell more annuities and reverse the trend of lower fees in 401k accounts. For some, annuities in 401k may make sense but for many they will be sold despite not being the best solution.

See our Annuity Blog post for more detail on annuities in general.

Small Business

Several rules were changed to make it easier for multiple small businesses to combine resources to provide their employees with a retirement plan. This allows small businesses to act together as if they were a single larger employer, allowing the group to enjoy some benefits of economies of scale.

Additional tax credits were also created for small businesses to incent more adoption of retirement plans and plans that automatically enroll employees into saving a portion of their paycheck into retirement accounts. See your tax professional for more detail on how you can take advantage of this.

Kiddie Tax

The Kiddie Tax Changes from 2018 have been repealed such that income subject to the Kiddie Tax is once more taxable at the parent’s marginal rate, as opposed to tax rates for trusts. This change can be elected for 2018 and 2019, in addition to being in force for 2020.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Paul is a Certified Financial Planner® and has been with Personal Capital since they first moved to Denver in 2013. With over a decade of industry experience, Paul’s current role as Director of Advisory Service keeps him focused on a team of over 60 Financial Advisors and their clients.

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