As elder law and estate planning attorneys, we pay close attention to legislative changes that can impact our clients. At the end of 2019, one of these situations started to come to light, and it became a reality when the SECURE Act was enacted in December.
The changes took effect in 2020, and they affected some key rules for individual retirement accounts. In October, a fresh piece of bipartisan legislation that is being called SECURE Act 2.0 was introduced to expand the IRA adjustments.
We will take a look at the proposed changes in this post, but before we go there, we will provide a recap of the changes that have already been implemented.
Required Minimum Distribution Age
If you have a traditional individual retirement account, you make contributions before you pay taxes on the income. You can start to take penalty-free distributions when you are 59.5 years of age, and there is a 10 percent penalty for early withdrawals.
The Internal Revenue Service wants to start getting paid while you are still living, so there is an age at which you are compelled to take required minimum distributions (RMDs). This age was 70.5 prior to this year, but the SECURE Act raised it to 72.
Another change gave traditional IRA account holders the ability to continue to contribute into their accounts without regard to their age. In the past, the contributions had to come to an end when the account holder reached the mandatory minimum distribution age.
The other type of individual retirement account that is widely utilized is the Roth IRA. These changes did not apply to Roth accounts, because they are funded with after-tax income. As a result, there has never been a mandatory minimum distribution requirement or an age limit for making contributions.
SECURE Act 2.0 Proposed Changes
The sequel to the first legislation would increase the required minimum distribution age for traditional account holders to 75, and this is the most significant change.
As it stands today, 401(k) account holders who are 50 years of age and older can make additional $6500 annual catch-up contributions. Secure Act 2.0 would increase this amount to $10,000 for individuals who are 60 years of age and older.
Middle and low income retirement plan participants get a $1000 savers credit, and the new legislation would raise this credit to $1500. It would also raise the income eligibility threshold, so more people would be able to qualify for the credit.
Employers would be required to enroll their employees into their group retirement savings plans, but the employees would have the freedom to opt out. Another provision would allow employers to provide retirement account matches for employees that make qualified student loan payments.
Elimination of Stretch IRA
Another change that was implemented when the first SECURE Act was enacted eliminated a popular inheritance planning strategy called the “stretch IRA.”
Non-spouse beneficiaries have always been required to take required minimum distributions on an annual basis, and this has not changed. However, before the aforementioned legislation was enacted, beneficiaries could take only the minimum that was required for any length of time.
This would maximize the tax benefits, and the strategy was particularly useful for young beneficiaries of well-funded Roth accounts. Now, an inherited individual retirement account must be closed within 10 years.
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