We often get questions from clients about the way that an individual retirement account can fit into your estate plan. In this post, we will share some news about the required minimum distributions (RMDs) and some pending changes that are looming over the horizon.
Traditional IRA RMDs
If you have a traditional individual retirement account, you make pretax contributions. This is going to result in larger paychecks, because you are being taxed on less income, and this is one of the benefits.
Instead of paying taxes when you are in a high tax bracket while you are working, the distributions are taxed. Presumably, you would be retired when you start to take distributions, so you would be in a lower bracket.
The parameters that have been put in place via legislative mandate call for required minimum distributions when account holders reach a certain age. Prior to 2020, the age was 70.5, but it was increased to 72 when the SECURE Act was enacted in December of 2019.
This year, the required minimum distribution formula has been changed to account for longer lifespans. As a result, the RMDs that must be taken by traditional account holders that are 72 years of age and older have been lowered.
Another SECURE Act change that impacted traditional account holders applies to ongoing contributions after you are older than 72. You can now continue to contribute into the account as long as you are earning income, but this was not the case before the SECURE Act was enacted.
Roth Individual Retirement Accounts
The reduction in the required minimum distributions has no relevance when it comes to Roth account, because you never have to withdraw money from a Roth account. This is because of the fact that these accounts are funded with after-tax earnings, so the taxes have been paid.
You have always been able to contribute into Roth accounts without any age limit.
Stretch IRA Elimination
Beneficiaries of individual retirement accounts are required to take minimum distributions. The distributions to traditional account beneficiaries are taxable, and Roth account beneficiaries do not pay taxes on the distributions.
Before the SECURE Act came along, the beneficiaries could take only the minimum that was required for any length of time. If you were a younger beneficiary, you would be required to take less than an older counterpart because of your life expectancy.
Think about the position that a Roth account beneficiary would be in under these circumstances. They would not pay taxes on the income, so they could take only the minimum that is required for the maximum length of time to get the most out of the tax benefits.
This was called the “stretch IRA” approach, and it was also useful for traditional account beneficiaries. Unfortunately, a provision in the SECURE Act put an end to this practice. Now, an inherited IRA must be cleared out and closed within 10 years of the time of acquisition.
SECURE Act 2.0
Last year, the Securing a Strong Retirement Act was introduced into the House of Representatives, and it is colloquially referred to as SECURE Act 2.0. It has bipartisan support, so it may be passed this year, though many people thought that it would be enacted in 2021.
It would require employers to enroll all eligible employees into their 401(k) plans. The savers credit for low-income workers would go from $1000 to $1500, and more plan participants would be eligible.
There would be an increase in the catch-up credit for workers that are between 62 and 64. They would be able to contribute an extra $10,000 into their 401(k) plans each year.
Another change would benefit workers that have student loan bills. Employers would have the freedom to match student loan payments with 401(k) contributions on behalf of their employees.
Schedule a Consultation Today!
Today is the day for action if you are going through life without a custom crafted plan that provides for everyone in your family in the ideal manner. If you are ready to get started, you can schedule a consultation at our Cincinnati estate planning office if you call us at 513-721-1513.
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