We recently shared a post about individual retirement accounts and inheritance planning. There has been a new development, and we will share it here to keep you up-to-date. But first, we will provide a review for those that may have missed the related entry.
Traditional Individual Retirement Accounts
A traditional IRA is funded with after-tax earnings, so you get tax breaks along the way. On the other side of the coin, when you make withdrawals from the account, they are subject to taxation.
The Internal Revenue Service wants to start collecting before you pass away, so you are required to take mandatory minimum distributions when you are 72 years of age. This age was 70.5 before the SECURE Act was passed at the end of 2019.
Prior to the enactment of this legislation, the contributions into traditional accounts had to come to an end when the account holder was 70.5 years of age. Now, there is no age restriction at all.
You can choose to take penalty-free withdrawals when you are 59.5 years old, and if you violate this rule, you pay a 10 percent penalty and the distributions are taxable. However, there are a few exceptions.
An account holder can take up to $10,000 out of the account to help finance a first home purchase without being penalized. Resources can be used to pay for school tuition or unpaid medical bills, and you can take distributions to pay health insurance premiums if you are unemployed.
Roth IRAs
The difference between a Roth individual retirement account and a traditional account is the timing of the taxation. You make contributions into a Roth account after you pay taxes on the income, so distributions are not taxed.
Since the taxes have already been paid, the IRS is satisfied, so there is no mandatory distribution age. If you choose to do so, you can let the assets continue to grow indefinitely without ever taking money out of the account.
There has never been any age limit when it comes to making contributions into a Roth individual retirement account. The guidelines are the same when it comes to the age at which you can take penalty free distributions, with one difference.
You can withdraw the contributions from a Roth individual retirement account at any time without being taxed, but the age threshold applies to distributions of the interest.
Rules for IRA Beneficiaries
The SECURE Act eliminated a very popular estate planning strategy that was especially useful for Roth individual retirement account beneficiaries.
Non-spouse beneficiaries of both types of accounts are required to take mandatory minimum distributions on an annual basis. The amount that must be distributed is based on the age of the beneficiary and the balance in the account. Younger beneficiaries would be able to take less than their older counterparts.
Estate planning attorneys advised clients to take only the minimum that was required by law for as long as possible. This is called the “stretch IRA” strategy, but the SECURE Act put an end to it. Now, all resources must be cleaned out of an inherited IRA within 10 years of the acquisition.
SECURE Act 2.0
Now that we have set the stage appropriately, we can get to the point of this post. A bipartisan piece of legislation that is being called SECURE Act 2.0 has been introduced into the United States House of Representatives.
It would make additional changes to the IRA guidelines. The one that is most eye-catching is an increase in the age at which traditional account holders must take required minimum distributions. Under a provision in this measure, it would go up to 75 years of age.
Employers would be required to enroll all eligible employees into their group retirement plans, and employees could opt out. The savers credit for low and middle income employees would be increased from $1000 to $1500, and the income threshold would be lowered.
This measure would allow employers to provide retirement account matches for employees that make qualified student loan payments. They would also raise the maximum IRA catch-up contribution for people that are 60 years old and older. It would go up to $10,000 for retirement plans and $5000 for SIMPLE IRAs.
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We are here to help if you are ready to work with an attorney to put an estate plan in place. You can send us a message to request a consultation appointment at our office in Smithtown, and we can be reached by phone at 631-265-0599.
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