Traditional individual retirement accounts are funded before taxes have been paid on the earnings, so the contributions are subject to regular income taxes. The taxes must be paid at some point, so lawmakers have mandated required minimum distributions (RMDs).
Account holders are required to take distributions when they reach the age of 72. The amount that must be taken is based on the life expectancy of the person in question. It has increased by just over two years, and the IRS is taking this into account.
The table that is used to calculate the required minimum distributions has been adjusted, so the RMDs in 2022 are lower than they were last year. To provide some insight, the required distribution for a 74-year-old person with $300,000 in a 401(k) would be $11,765.
Roth Individual Retirement Accounts
These changes have no impact on Roth IRAs because they are funded with after-tax earnings. The IRS has already received its share, so there is no reason to require distributions. You can leave assets in a Roth account untouched until you pass away if you choose to do so.
SECURE Act Changes
In December of 2019, the SECURE Act was enacted, and it changed the individual retirement account parameters. We have stated that the RMD age for traditional individual retirement accounts and 401(k) accounts is 72. Prior to the enactment of this measure, the age was 70.5.
Another provision gave people that have these accounts the ability to continue to make contributions as long as they are earning income. Before the SECURE Act came along, the contributions had to stop when the account holder reached the RMD age.
There is another very significant change that impacted both types of accounts. In the past, estate planning attorneys would recommend the “stretch IRA” strategy. The beneficiary of an IRA could accept the minimum that was required by law for the maximum length of time.
In this manner, they would maximize the tax advantages. Now, the assets in an inherited individual retirement account must be removed within 10 years of the transfer to the beneficiary.
SECURE Act 2.0
A companion piece of legislation that is formally called the Securing a Strong Retirement Act was introduced into Congress last year. It is being alternately referred to as “SECURE Act 2.0.”
Under the terms of this measure, the savers credit for lower income workers that are participating in 401(k) plans would go from $1000 to $1500. The eligibility standards would be broadened so more people would be able to take advantage of the credit.
The catch-up contribution for workers that are between the ages of 62 and 64 would be increased to $10,000. Another provision would compel employers to enroll all eligible employees into their 401(k) plans, and individuals could choose to opt out.
A lot of people that have student loans make payments that would have otherwise gone into 401(k) accounts. Under SECURE Act 2.0, employers would be allowed to match these payments in the form of 401(k) contributions.
Need Help Now?
At some point, it is time to take the final step and work with an attorney to put a plan in place. If you are ready to do just that, you can schedule a consultation via Zoom or at our Naperville or North Aurora, IL estate planning offices if you call us at 630-568-6811. You can also simply send us a message.