At the end of 2019, the SECURE Act was signed into law, and it went into effect the following year. It impacted two key rules for traditional individual retirement accounts, and it includes a provision that applies to the beneficiaries of traditional and Roth IRAs.
The Securing a Strong Retirement Act has been making progress through the legislative process this year, and it is on track to be approved. It is commonly referred to as SECURE Act 2.0 because it is a follow-up measure that builds on the original version.
SECURE Act Provisions
Before we explain the provisions that are contained in the bill that is currently under consideration, we will provide a recap of the changes that have already been implemented.
Traditional individual retirement account holders fund the accounts before they pay taxes on the income. The taxation is deferred, but it is not avoided. When distributions are taken from the account, they are looked upon as taxable income by the state and the Internal Revenue Service.
If you have one of these accounts and you were not required to accept distributions, the tax authorities would never collect anything while you are living. This is arrangement that is not to their liking, so there is an age at which you are required to take distributions.
Prior to the enactment of the SECURE Act, the age was 70.5, and you had to stop contributing into the account at that point. Under this measure, the age has been increased to 72, and the restriction on ongoing contributions after you reach this age was lifted.
Beneficiaries of Roth and traditional individual retirement accounts have always been compelled to take required minimum distributions (RMDs). Before the SECURE Act came along, estate planning attorneys would recommend the “stretch IRA” strategy.
The idea was to take only the minimum that was required by law for the maximum length of time. Roth account beneficiaries do not pay taxes on the distributions, so it was especially useful for beneficiaries of Roth accounts that were well-funded.
This window of opportunity was closed when a 10-year withdrawal mandate was included in the SECURE Act. All assets must be removed from an inherited individual retirement account within 10 years of the time of acquisition.
SECURE Act 2.0
This new piece of legislation would increase the required minimum distribution age for traditional account holders to 75, but it would be gradual. The age would go up to 73 in 2022, it would reach 74 in 2029, and the RMD age would be 75 in 2032.
Employers would be required to automatically enroll employees into their workplace 401(k) plans. What happens if you don’t want to participate? You can simply opt out if you choose to do so.
A lot of employees feel as though they cannot contribute into retirement plans because they are saddled with student loan payments. This measure would give employers the ability to provide 401(k) matches of qualified student loan payments.
There is a $1000 savers credit right now for retirement plan participants that make less than a certain amount of money. This would go up to $1500, and the threshold would be adjusted to allow more people to become eligible for the credit.
As it stands today, workers that are 50 years of age and older can contribute an additional $6500 into their 401(k) plans as the catch-up contributions. SECURE Act 2.0 would allow for $10,000 catch-up contributions for plan participants that are 62 to 64 years of age.
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We have developed an estate planning worksheet that you can go through to gain a more thorough understanding of this important process. It is free, and you can get your copy right now if you head over to our worksheet access page.
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