The individual retirement account guidelines changed recently after the SECURE Act was enacted in December of 2019. There are follow-up pieces of legislation in the House and Senate that will make further changes, and we will look at them here.
Original SECURE Act
We will start with a review of the changes that have already been implemented via the first piece of legislation.
Traditional individual retirement account holders contribute into their accounts before they pay taxes on the income, so they get a break in the near term. However, distributions are looked upon as taxable income by the IRS.
Roth accounts are funded after the taxes have already been paid, so distributions are not taxed. If you have a Roth account, you are never required take any money out of the account, regardless of your age.
Since taxes have never been paid by traditional account holders, the IRS wants to start getting their share eventually, so required minimum distributions (RMDs) have been mandated. The age at which the distributions had to be taken was 70.5 before the SECURE Act came along.
A provision contained within the measure increased this age to 72, and account holders were given the ability to contribute into their accounts after they reach this age. Previously, they had to stop making contributions after they reached the RMD age.
Elimination of the Stretch IRA
Non-spouse beneficiaries of traditional and Roth IRAs are required to take distributions on an annual basis. A beneficiary could take only the minimum that was required for the maximum length of time to take full advantage of the tax benefits.
This was called the “stretch IRA” strategy, and it was very effective from an estate planning perspective. It was particularly useful for Roth account beneficiaries because the distributions are not taxable.
A provision in the SECURE Act closed this window of opportunity because it requires account holders to clear out their accounts within 10 years of the time of acquisition.
SECURE Act 2.0 and the Retirement Security & Savings Act
The Securing a Strong Retirement Act or SECURE Act 2.0 is progressing through the United States House of Representatives, and the Retirement Security & Savings Act is a similar bill that is in the Senate.
These measures would make further changes to the individual retirement account parameters. One of them is an additional increase in the required minimum distribution age for traditional account holders. It will go up to 75 if and when these measures are enacted.
We should point out the fact that it is very likely that these changes will be implemented because the bills have strong bipartisan support, they were introduced on a bipartisan basis.
Employees will be automatically enrolled into their workplace 401(k)s, and they would be given the opportunity to opt out. The 401(k) catch-up contribution for older workers would go up to $10,000; it is currently $6500.
A lot of employees that are saddled with student loan debt do not have enough income to contribute into retirement savings accounts. To address this issue, under SECURE Act 2.0, employees would be able to provide 401(k) matches for employees that make qualified student loan payments.
There is a savers credit for people that contribute into retirement savings accounts that are in low to moderate income brackets. It is $1000 at the present time, and it would go up to $1500. Plus, the parameters would be changed to allow more people to become eligible for the credit.
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