We recently wrote a post about a piece of legislation that was introduced into the House that is being called SECURE Act 2.0. This is a reference to the original piece of legislation with this name that changed some of the rules that impact individual retirement accounts.
On May 5, this measure cleared the House Ways and Means committee, so it is moving along the legislative path. It has bipartisan support, so many observers feel as though we will see some additional changes in the near future.
Before we look at them, we will provide a recap of the changes that have gone into effect as a result of the SECURE Act that was enacted at the end of 2019.
Stretch IRA Elimination
Beneficiaries of individual retirement accounts have always been compelled to take required minimum distributions annually. The amount that they must accept is based on their life expectancy and the balance that is in the account.
Roth individual retirement accounts are funded with after-tax earnings, so distributions to account holders and beneficiaries are tax-free. The taxation works in the reverse manner with a traditional individual retirement account.
The “stretch IRA” strategy was recommended by estate planning attorneys. The idea was to take only the minimum that is required by law to stretch out the tax savings for as long as possible.
Since Roth beneficiaries do not pay taxes on the distributions, this was particularly effective for these individuals. And of course, younger beneficiaries would be able to stretch their accounts for longer periods of time.
A provision that is contained within the SECURE Act put an end to the stretch individual retirement account. Now, all assets must be removed from an inherited IRA within 10 years.
Required Minimum Distribution Age
Another change impacted traditional individual retirement account holders only. They are required to take distributions when they reach a certain age, because the IRS wants to start getting their share while the account holder is still living.
There is no such requirement with a Roth IRA because the taxes have already been paid.
The SECURE Act increased the required minimum distribution age from 70.5 to 72 years of age.
Open-Ended Contributions
Prior to the enactment of this measure, traditional account holders had to stop making contributions when they were required to take distributions. Now, they can continue to contribute into their accounts for as long as they are earning income.
Roth account holders were always able to make contributions without any age constraints.
SECURE Act 2.0
The new measure that is being considered in Congress is formally called the Securing a Strong Retirement Act of 2021, and SECURE Act 2.0 is another way of referring to it.
One proposed change that immediately catches your eye is another increase in the required minimum distribution age for traditional account holders. Under the terms of this measure, it would go from 72 to 75.
The Savers Credit for low to moderate income workers is currently $1000, and it would go up to $1500. Plus, more people would qualify, because the income threshold would be increased.
There are people that do not contribute into retirement accounts at work because they are strapped with student loan payments. This measure would give employers the right to provide retirement account matches of qualified student loan payments that are made by their employees.
Under another provision, employers would be required to enroll all eligible employees into their retirement savings plans. If an employee wants to opt out, they would have that right.
A $1000 catch-up contribution for individual retirement accounts is available to people that are 50 years of age and older. This has not been increased since 2006, even though inflation has taken a toll, so SECURE Act 2.0 would index the contribution for inflation.
This measure includes an increase in the 401(k) catch-up contribution for people that are in their 60s. It would go from $6500 to $10,000.
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Our doors are open if you are ready to work with a Naperville or North Aurora, Illinois estate planning attorney to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 630-568-8611.
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