A post that we shared a number of weeks ago highlighted a piece of legislation that was introduced into the House of Representatives. It was being called SECURE Act 2.0 because it is an expansion of changes that have already been implemented via the SECURE Act.
The first measure was enacted in December of 2019, and it went into effect the following year. It is relevant to estate planning and elder law attorneys because it changed the guidelines for individual retirement accounts.
In this post, we will look at the new measure that is formally called the Securing a Strong Retirement Act of 2021, but before we get there, we will review the changes that have already been implemented.
Traditional Individual Retirement Accounts
Traditional IRAs are funded with pretax earnings, so there is a tax break in the near term, but the distributions are subject to regular income taxes. Roth account contributions are made after taxes have been paid on the income, so distributions are not taxable.
Two of the changes that came about as a result of the initial SECURE Act apply to traditional accounts. You have to take mandatory minimum distributions if you have a traditional IRA, and the age at which you must take them was increased from 70.5 to 72.
This change does not impact Roth accounts because mandatory distributions are not required. The mandate for traditional account holders gives the IRS a chance to start collecting their share before the account holder dies.
Prior to the enactment of the SECURE Act, account holders were no longer allowed to make contributions after they reached the requirement distribution age.
The measure eliminated this rule, so there is no longer any age limit. Roth account holders have always been able to contribute into their accounts indefinitely.
Elimination of the Stretch IRA
There was one major SECURE Act change that impacted both types of accounts. As you would expect, distributions to beneficiaries of Roth accounts are not taxed, but distributions to traditional account beneficiaries are taxable.
Non-spouse beneficiaries have always been compelled to take required minimum distributions on an annual basis. Before this measure was enacted, they could take only the minimum that was required by law for any length of time to take full advantage of the tax benefits.
This stretch IRA the opportunity was extinguished when the SECURE Act came along. Beneficiaries must now take all of the resources out of the account within 10 years, so the open-ended stretch is a thing of the past.
Securing a Strong Retirement Act of 2021
The Securing a Strong Retirement Act or SECURE Act 2.0 has cleared the House Ways and Means Committee as of May 5. It is on its way to the full House of Representatives, it has bipartisan support.
This measure would bump the required minimum distribution age for traditional account holders up to 75, and it would require employers to enroll all employees into their retirement savings plans.
The Savers Credit for low and middle income earners is currently $1000. This measure would provide a 50 percent increase, and the parameters would be changed to allow more taxpayers to take advantage of the tax credit.
People that are 50 years of age and older are currently allowed to add a $1000 catch-up contribution. It has not been changed since 2006, and the new measure would allow for inflation indexing.
Individuals that are over the age of 60 can contribute an extra $6500 into their 401(k)s, and this measure would allow for $10,000 catch-up contributions.
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