In December of 2019, the SECURE Act was signed into law, and it went into effect this year. It changed the individual retirement account parameters in some important ways.
A new piece of legislation that is been dubbed SECURE Act 2.0 was introduced into Congress in late October, and if it is passed, there would be more changes to 401(k) plans and IRAs.
Before we look at the legislation that is on the table right now, we will provide a recap of the changes that were included in the first SECURE Act.
Required Minimum Distribution Age
You make contributions into a traditional individual retirement account before you pay taxes on the income. As a result, you have to pay taxes when you take withdrawals from the account.
We used the word “when” because you are compelled to take required minimum distributions (RMDs) when you are 72 years of age. Prior to the SECURE Act, account holders had to start to take required minimum distributions when they were 70.5 years old.
They also had to stop contributing into their accounts when they were 70.5 years of age, but this cap has been lifted. A traditional account holder can make contributions indefinitely.
Roth individual retirement accounts are funded with after-tax income, so withdrawals are not taxed. The reason why distributions are required for traditional account holder is because the IRS wants to start getting some money eventually.
Since the taxes have already been paid, Roth account holders are not compelled to take distributions at any time. These account holders have always been allowed to fund their accounts for any length of time without any age restrictions.
We should point out the fact that holders of both types of accounts can begin to take voluntary distributions without being penalized when they are 59.5 years old. This penalty-free distribution age was not changed when the SECURE Act was enacted.
Rules for Beneficiaries
There is a very big change that affected non-spouse beneficiaries of Roth individual retirement accounts.
Beneficiaries of both types of accounts are required to take minimum distributions on an annual basis. Distributions are taxable for traditional account beneficiaries, and Roth account beneficiaries receive the distributions tax-free.
The amount that must be accepted is based on the age of the beneficiary; a younger person would be allowed to take less than someone that is older because it is based on life expectancy.
Prior to the enactment of the SECURE Act, beneficiaries could stretch out the distributions for as long as possible to maximize the tax benefits. Relatively young beneficiaries of Roth accounts that were very well-funded used this strategy to great advantage.
Now, a beneficiary has 10 years after the death of the original account holder to withdrawal all of the assets, so the open-ended stretch IRA is not an option.
SECURE Act 2.0
One of the changes in the proposed legislation that would alter the playing field is an increase in the required minimum distribution age for traditional account holders. Under the terms of this measure, they would be able to wait until they are 75 years of age.
Employers are currently allowed to automatically enroll employees into their retirement plans, but the new law would require them to take this action. It should be noted that employees can choose to opt out after they have automatically been enrolled.
Low and middle income contributors into individual retirement accounts have been getting a $1000 credit. This new piece of legislation would increase the credit to $1500, and the income eligibility limit would rise.
People that are 50 years of age and older can make catch-up contributions that exceed the annual contribution limit for 401(k) account holders. Right now they can contribute up to $6500 to catch up, and the proposed SECURE Act 2.0 would increase the limit to $10,000 for people that are 60 years of age and older.
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