In December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed. There are still many unknowns on how to interpret these changes. But before you sign your divorce settlement, understand if these changes will impact you.
Here are some changes to discuss with your family law attorney, financial advisor, tax advisor, and estate planning attorney.
Inherited Retirement Accounts:
Distribution for non-spouse beneficiaries of inherited retirement accounts can no longer be taken over the lifetime of the beneficiary. The SECURE Act reduced the distribution period to 10 years.
Please note, there are exceptions to this change (e.g., disabled or chronically ill individuals).
If you expect your income to come from an inherited retirement account, understand the tax consequences of taking distributions in 10 years. If you have earned income and have to take the distribution, you may be bumped into a higher tax bracket.
Keep in mind spousal support (aka, alimony) for divorces finalized after December 31, 2018, or modified specifically stating Tax Cuts and Jobs Act (TCJA) is no longer taxable income for the recipient and no longer tax deductible for the payor.
Understand the tax consequences of your income before you agree to your divorce settlement.
If your minor child is your retirement account beneficiary, the 10-year rule takes effect once they reach age of majority for your state.
Saving for Retirement:
Whether retirement is a long way down the road or around the corner, it’s important to include it when developing your divorce settlement.
If your only income source is alimony and it was determined when the TCJA went into effect, you will not be able to contribute to a traditional or Roth IRA. Both types of retirement accounts require earned income.
However, with the SECURE Act, you could add to your retirement savings with part-time work. The SECURE Act allows part-time workers to participate in their employer’s 401(k) plan.
The prerequisite is that the employee must work at least 500 hours during a three-year period. This change applies to 2021 plans. As a result, participation for part-time employees would begin in 2024.
If you own a small business (less than 100 employees), the SECURE Act increases your potential tax credit when you establish an employer-sponsored retirement savings plan.
Expansion of Section 529 plans:
The SECURE Act allows up to $10,000 to be used from a 529 Plan for a qualified student loan repayment. If your soon-to-be-ex-spouse has outstanding student loan debt, it may be tempting to use funds from a 529 to repay the debt.
Discuss with your family law attorney how to safeguard these funds from misuse.
With recent changes from the SECURE Act, it’s important to discuss the impacts with your trusted professional advisors. These advisors should include your family law attorney, financial advisor, tax advisor, and estate planning attorney.
They will each share with you their perspective and provide guidance on how these changes may impact your divorce. It could be a costly mistake if you rush to sign your divorce settlement without understanding these changes.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, RICP®, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, Niv consults with clients on money, life, and work. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant, executive recruiter, and financial advisor. Her services include developing spending plans, comprehensive financial plans, divorce financial reviews, retirement plans. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me.’”