Your individual retirement account will probably be important to you during your senior years, and if you do not need all of the money, it can be part of your estate. You should fully understand the guidelines, and there are some changes looming over the horizon.
The House of Representatives has recently approved the Securing a Strong Retirement Act or SECURE Act 2.0. We will explain its contents, but first, we will review the original SECURE Act changes that have been implemented.
The traditional individual retirement account is funded with pretax earnings, so you pay taxes on less income if you have this type of account. This is beneficial, but you do have to pay taxes when you take distributions.
Presumably, you would be in a lower tax bracket when you are retired, so there is a tax benefit even though you will be taxed. Because the IRS wants to have the ability to collect taxes while you are living, you are compelled to take required minimum distributions (RMDs).
Before the SECURE Act was enacted, the age at which you had to start taking the distributions was 70.5. A provision in this measure raised the required minimum distribution age to 72.
Traditional account holders had to stop making contributions into their accounts when they reached the age of 70.5. This requirement was eliminated when the SECURE Act was enacted.
Elimination of Stretch IRA
Non-spouse beneficiaries of either type of account have always been required to take distributions. Roth account beneficiaries do not pay taxes on the income, but as you would expect, distributions to traditional account beneficiaries are taxable.
Beneficiaries used to be able to take only the minimum that was required by law for any length of time. This would maximize the tax benefits, and younger beneficiaries of Roth accounts that were very well-funded were especially well served by the use of the “stretch IRA” strategy.
Unfortunately, the opportunity to prolong the distributions for any length of time has been extinguished. As a result of a provision in the SECURE Act, the accounts must be emptied and closed within 10 years.
SECURE Act 2.0
One of the major provisions in the measure that has cleared the House would raise the RMD age for traditional account holders to 75, but it would be gradual. It would be 73 this year, and it would eventually reach 75 in 2032.
Employers would be required to enroll employees into their 401(k) programs without prior approval. Workers would be able to opt out if they choose to do so, but they would be automatically enrolled.
The savers credit for low to average income earners would go from $1000 to $1500, and a larger number of people would be eligible for the credit.
A significant percentage of employees that are paying down student loans do not contribute into retirement plans because they do not have the luxury of saving. This measure would give employers the ability to provide 401(k) matches of qualified student loan payments.
There is currently a $6500 catch-up contribution for 401(k) plan participants that are at least 50 years of age. This would go up to $10,000 for those that are 62, 63, and 64 under SECURE Act 2.0.
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