In 2020, we have been working with some new individual retirement account parameters that came about due to the SECURE Act that was passed at the end of 2019.
A fresh piece of legislation that is being called SECURE Act 2.0 has been introduced into the House of Representatives. We will explain the most important details in this post, but before we get there, we should provide some background information about the first version.
Roth vs. Traditional Individual Retirement Accounts
Though there are some variations, the most commonly used individual retirement accounts are traditional accounts and the Roth IRA. The major difference is the timing of the taxation.
With a Roth individual retirement account, contributions are made into the account after taxes have been paid. As a result, distributions are not subject to taxation, and account holders are never required to withdraw money from their accounts.
You have always been able to contribute into a Roth individual retirement account for any length of time without regard to your age.
Traditional individual retirement accounts are funded with pretax income, so the distributions are subject to regular taxes. Since the IRS wants to start getting some money while the account holder is still living, you are compelled to take required minimum distributions (RMDs) at some point.
Before the enactment of the first SECURE Act, the RMD age was 70.5, and contributions into the account had to stop when you reached that age. Now, it is 72, and you can continue to contribute into the account for an open-ended period of time.
You can take penalty-free withdrawals when you are 59.5 years of age when you have a traditional account. The same age applies to Roth accounts for distributions of the earnings, but account holders can withdraw the contributions at any age without being penalized.
Rules for IRA Beneficiaries
Non-spouse individual retirement account beneficiaries are required to take mandatory distributions on an annual basis. The amount is based on the amount of money in the account and the age of the beneficiary.
Distributions to Roth IRA beneficiaries are not taxed, and traditional account beneficiaries have to report the income.
A very popular estate planning strategy fell by the wayside when the SECURE Act went into effect.
Prior to this year, beneficiaries were allowed to stretch their individual retirement accounts. They would take only the minimum that was required by law for the longest possible period of time.
In so doing, they would maximize the tax benefits. This was particularly lucrative for relatively young beneficiaries of well-funded Roth accounts.
Now, all of the assets must be removed from either type of account within 10 years of the time of acquisition, so the open-ended stretch IRA concept has been abolished.
SECURE Act 2.0
One of the most significant changes that is included in SECURE Act 2.0 is an increase in the required minimum distribution age for traditional account holders. Under a provision contained within this measure, it would go up to 75.
Employers would be required to enroll all eligible employees in their group retirement plans, and the employees would be able to opt out. Willing employers would also be able to provide retirement account matches for employees that make qualified student loan payments.
The savers tax credit for middle and low income participants would go up from $1000 to $1500, and the income ceiling would be increased.
401(k) account holders that are 50 years of age and older can currently make $6500 annual catch-up contributions above the standard limit. If SECURE Act 2.0 is passed in its current form, the limit would go up to $10,000 for people that are 60 years of age and older.
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