Individual retirement accounts are used by most Americans to prepare for their senior years, and they are also passed along to beneficiaries. As elder law and estate planning attorneys, we keep a finger on the pulse of legislative statutes that impact the IRA guidelines.
The SECURE Act was enacted on December 20, 2019, and it went into effect in 2020. Now, a bipartisan piece of legislation that is being dubbed SECURE Act 2.0 has been introduced into the House.
We will look at the proposed changes in this new piece of legislation, but first, we will explain the current state of affairs in the aftermath of the first SECURE Act.
Traditional Individual Retirement Accounts
Traditional individual retirement accounts are funded before taxes have been paid on the income, so there tax breaks at first. Distributions from the accounts are subject to taxation, but the assumption is that you will be in a lower tax bracket when you are retired.
You can take penalty-free distributions when you are 59.5 years of age, and prior to the enactment of the SECURE Act, you were compelled to take required minimum distributions (RMDs) when you were 70.5. At that point, you were no longer allowed to contribute into the account.
A provision contained within SECURE Act upped the minimum distribution age to 72, and the age cap on contributions was lifted.
Roth IRAs
These two changes did not impact Roth individual retirement account holders. They have never been forced to take distributions, and they could always contribute into the accounts for open-ended periods of time.
The reason for the difference is the fact that contributions into a Roth account are made after taxes have been paid, so distributions are not taxable. As a result, the IRS has no motivation to compel account holders to take payouts that would be taxed.
Rules for Beneficiaries
There was a major change in the rules for beneficiaries when the initial SECURE Act was passed that eradicated a very effective estate planning strategy.
Non-spouse beneficiaries are required to take minimum distributions on an annual basis. As you would imagine, distributions to Roth account beneficiaries are not taxable, and traditional account beneficiaries must declare the income.
Prior to the enactment of this legislation, beneficiaries could implement the “stretch IRA” approach. They would take only the minimum that was required for as long as they could, and this would maximize the tax benefits.
This was ideal for relatively young beneficiaries of Roth individual retirement accounts that were very well-funded. Now, the accounts must be closed within 10 years of the acquisition, so the open-ended stretch is no longer possible.
SECURE Act 2.0 Proposed Changes
One major change in the SECURE Act 2.0 bill would raise the required minimum distribution age for traditional account holders 75. In addition to this, it would also require employers to enroll eligible employees into their group retirement accounts.
As it stands now, there is a $1000 savers tax credit for people in lower income brackets above and beyond the deductions for the contributions. This would go up to $1500 under the terms of the new bill.
Catch-up 401(k) contribution limits for people that are 60 years of age and older would rise from $6,500 to $10,000. Another change would allow employers to provide retirement account matches that equal student loan payments that are made by their employees.
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