A spouse who inherits an individual retirement account, otherwise known as “IRA” can roll it over into their account or retitle the account as an inherited account. The rollover option is not available to non-spouse beneficiaries.
Distributions to a Roth individual retirement account beneficiary are not taxable, but traditional account distributions are taxable income. Beneficiaries of both types of accounts are required to take minimum distributions.
Before the enactment of the first SECURE Act, a beneficiary could take only the minimum that was required by law for any length of time. This is called “stretching an IRA,” and it was especially effective for beneficiaries of Roth IRAs that were very well-funded.
They could take advantage of the tax benefits for the maximum length of time, but this changed when the SECURE Act was enacted. Now, all the assets must be withdrawn from either type of account within 10 years of the time of acquisition.
What are the other changes to IRA will be implemented when the new legislation is enacted?
A significant percentage of younger employees cannot participate in the 401(k) plans that are offered by their employers because of the financial impact of student loan payments.
When and if these changes are implemented, employers will be able to provide 401(k) matches for employees who make these payments. Another change would automatically enroll all eligible employees into their employers’ retirement savings plans.
The 401(k) catch-up contribution for older employees would go up to $10,000 for people who are 60 years of age and older. In the Senate bill, the increase would be in place without an age limit, and there is a three-year window (62-64) in the House bill.
There is a savings credit for low and moderate-income people that contribute to retirement savings plans. The Securing a Strong Retirement Act or SECURE Act 2.0 would expand the credit so more people can qualify, and the amount of the credit would be increased.
What is the difference between a traditional individual retirement account and a Roth IRA?
The differences revolve around the timing of the taxation. A traditional individual retirement account is funded with pre-tax earnings, so distributions from the account are subject to regular income taxes.
With a Roth individual retirement account, the tax situation is reversed. You pay taxes on the income before you make contributions, and as a result, the distributions are not taxable.
Can you contribute to a retirement savings account for an open-ended period?
If you have either type of individual retirement account, you can continue to make contributions as long as you are earning income. Before the enactment of the SECURE Act, traditional account holders had to stop making contributions when they were 70.5 years of age.
Are you forced to take money out of your account when you reach a certain age?
You are never compelled to take required minimum distributions from a Roth account because taxes have already been paid. There is a mandatory minimum distribution age for a traditional account so the IRS can start collecting some taxes.
Traditionally, the age was 70.5, but it was raised to 72 when the SECURE Act was enacted at the end of 2019, and it went into effect in 2020. Subsequently, two different pieces of bipartisan legislation have been introduced that would raise this age to 75.
These measures are the Senate Retirement Security & Savings Act and the Securing a Strong Retirement Act that has been introduced into the House of Representatives. There is no resistance from either party, so this change and some others will probably be implemented.