An individual retirement account can be used as a nest egg that you can draw from during your senior years. Of course, if you don’t need all the money, it would become part of your estate plan. It is also possible to proactively utilize an IRA for estate planning purposes.
At the end of 2019, the SECURE Act was enacted, and it made some significant changes to the parameters for individual retirement accounts. For over a year now, Congress has been considering a new piece of legislation that would expand on these revisions.
It is called SECURE Act 2.0, and they are making a final push to pass it before the new year. We will share the details in this post. However, before we reach that point, we will provide a review of the changes that have already been implemented.
Traditional Individual Retirement Accounts
With one very significant exception, the first piece of legislation impacted traditional individual retirement accounts, and the Roth account parameters did not change.
Contributions into a traditional account are made before taxes are paid, so the distributions are subject to taxation. A Roth account is funded with after tax earnings, so the distributions are not taxed.
If you have a traditional account, you can begin to take penalty free distributions of contributions and the earnings when you are 59.5 years of age. Roth account holders can remove contributions at any age without being penalized; the 59.5 threshold strictly applies to distributions of earnings.
The government wants to start getting their tax dollars at some point, so traditional account holders are compelled to take required minimum distributions (RMDs) when they are 72. They can continue to make contributions into the account after they reach this age, and there is no age limit.
Before the enactment of the first SECURE Act, the RMD age was 70.5, and you had to stop making contributions at that time.
Roth individual retirement account holders have always been able to make contributions at any age, and they have never been required to take distributions.
Elimination of Stretch IRA
Non-spouse beneficiaries of both types of accounts are required to take minimum distributions on an annual basis. As you would expect, Roth account beneficiaries pay no taxes on the distributions, and traditional account distributions are taxable.
Prior to the enactment of the first SECURE Act, estate planning attorneys recommended the “stretch IRA” strategy. The idea was to take only the minimum that was required for the maximum length of time to take full advantage of the tax benefits.
The required distributions would be based on the age of the beneficiary, so the strategy was ideal for relatively young beneficiaries of well-funded Roth accounts.
Unfortunately, this strategy fell by the wayside when the SECURE Act entered the picture. Now, all the funds must be cleared out of either type of account within 10 years of the time of acquisition.
SECURE Act 2.0 Changes
Now we can look at the proposed changes that would come about if SECURE Act 2.0 is ultimately enacted. One major change would increase the required minimum distribution age for traditional account holders to 75.
It would also compel employers to automatically enroll employees into their 401(k) plans. A minimum of three percent must be contributed, with a maximum of 10 percent. Employees can choose to opt out, but this is intended to hammer home the importance of saving for retirement.
Another change would give employees the ability to make qualified student loan payments in lieu of contributions into the 401(k). They would receive an employer match into their retirement accounts.
This would change the playing field for people that do not save for retirement because they are stretched thin because of the student debt.
People that are over 50 years old can add a $6500 catch-up contribution to the maximum annual contribution. If SECURE Act 2.0 is enacted, the catch-up contribution will be increased to $10,000 for people that are 60 years of age and older.
There would also be changes to the savers tax credit for low-to-moderate income workers. There would be a standardized percentage, and more people would be eligible.
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