In December of 2019, the SECURE Act was enacted by Congress and signed into law. It changed some of the individual retirement account parameters, and one of these changes was very significant from an estate planning perspective.
Now, a follow-up bill has been introduced that is called the Securing a Strong Retirement Act or SECURE Act 2.0. We will share the details here, but before we focus on the pending legislation, we will review the changes that have already been actualized.
Elimination of Stretch IRA
Non-spouse beneficiaries of individual retirement accounts must take required minimum distributions (RMDs) on an annual basis. Since Roth accounts are funded with after-tax earnings, the distributions to original account holders and beneficiaries are subject to taxation.
On the other hand, traditional accounts are funded with pretax earnings. As a result, the distributions are taxable for beneficiaries and initial account holders.
Before the enactment of the SECURE Act, estate planning attorneys recommended a strategy called the “stretch IRA.” The idea was to accept the minimum permissible distributions for the longest possible period of time.
This would maximize the tax benefits, and it was especially lucrative for relatively young beneficiaries of Roth accounts because the distributions are not taxed. Age was a factor because younger beneficiaries could take less than their older counterparts.
A provision contained within the SECURE Act put an end to this practice. Now, all assets must be withdrawn from an inherited individual retirement account within 10 years.
Traditional Account Changes
There were two other major changes that impacted traditional accounts. Account holders are required to take distributions when they reach a certain age because the IRS wants to start getting their share of the pie at some point.
The minimum age was 70.5, and it went up to 72 when this measure was enacted. Plus, account holders were given the ability to continue to contribute into their accounts after they reached the required minimum distribution age.
Securing a Strong Retirement Act
Secure Act 2.0 or the Securing a Strong Retirement Act has cleared the House Ways and Means Committee, and it has bipartisan support. One provision would increase the required minimum distribution age for traditional account holders to 75.
People that are at least 75 that have less than $100,000 in all their combined retirement savings accounts would be exempt from the required minimum distribution mandate.
Employers would be required to enroll all eligible employees into their 401(k) plans, and they would be able to provide retirement account matches for qualified student loan payments.
There is a $1000 Savers Credit for people that are in the lower income brackets, and this would go up to $1500. The guidelines would be changed to give more people the ability to utilize the credit.
Currently, there is a $1000 catch-up contribution for people that are in their 50s. There have been adjustments to account for inflation since it was established in 2006. Under the terms of this bill, the credit would be indexed for inflation.
Individuals that are 60 years of age and older can currently contribute an extra $6500 to their 401(k) accounts, and this measure calls for an increase to $10,000.
We Are Here to Help!
If you are going through life without a plan for aging that culminates in the passing of your legacy, action is required. There is no universal plan that is right for everyone, so you should work with an attorney to develop a custom crafted plan that ideally suits your needs.
We can gain an understanding of your situation and make the appropriate recommendations so you can make fully informed decisions.
You can schedule a consultation at our estate planning office on Oahu, Maui, or the Big Island if you give us a call at 808-531-5391. There is also a contact form on this site you can use to send us a message, and if you reach out electronically, you will receive a prompt response.