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Wealth Management: Building a Secure Future for Your Family

How the SECURE Act offers benefits for parents

By Brian Hartman

The SECURE Act, which was signed into law in December 2019, can affect the way many parents plan for child-related finances and expenses as well as college savings and compensation. While these changes can present some challenges, they may also provide new opportunities for savings. Let’s take a look:

Penalty-free retirement plan withdrawals for birth or adoption expenses
For expenses related to child adoption or birth, you are entitled to penalty-free distributions from your retirement plan. These distributions are still considered taxable income. Prior to the SECURE Act, these expenses were also subject to a 10% early withdrawal penalty. These penalties have now been reduced: up to $5,000 in distributions per individual can be used for adoption-related expenses without penalty.

That means for married couples, each parent is entitled to a $5,000 distribution from their own plan, for a total of $10,000 in unpenalized distributions. Regular income tax will still apply to such distributions.

Changes to the Kiddie Tax
After the adoption of the Tax Cuts and Jobs Act of 2017 (TCJA), the “Kiddie Tax” taxed the unearned income of minors at the same level as trusts and estates. As a result of the SECURE Act, the net unearned income of a child is taxed at the tax rate of the child’s parents (if higher than the child’s rate). If you have children with unearned income, pay close attention to the Kiddie Tax when filing taxes.

New ways to use 529 plans
Some good news about the SECURE Act is what it does for 529 plans. You can use distributions made after Dec. 31, 2018 to pay for things you couldn’t before. These include fees, books, supplies and equipment required for the beneficiary’s participation in an apprenticeship program.

Additionally, up to $10,000 per beneficiary (lifetime limit) can be used to pay the balance of qualified education loans. This provides another way to pay student loans and a new way to think about how to save and invest for college. Be aware that results may vary by state—some states may not follow the federal law changes to 529 plans.

Changing compensation status for graduate and postdoctoral students
Prior to the SECURE Act, if you received stipends or other payments from graduate or postdoctoral work, they were not treated as compensation for IRA contribution purposes. If this was your only form of income for the year, you were unable to contribute to your IRA account. Now, students who receive this kind of compensation can contribute it to their IRAs and start saving for retirement earlier than before.

Opening doors to new opportunities
As you can see, the SECURE Act impacts the way you plan for college expenses, taxes related to your children’s unearned income, birth or adoption costs, and more. Working with a financial professional can help you optimize your portfolio and take advantage of the rules that may benefit you the most.

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