A few weeks ago, we posted about a piece of legislation that could have an impact on your individual retirement account. We promised to share updates as the measure makes its way through the process, and we have some news to pass along.
Before we look at the proposed changes, we will provide an overview of the two different types of accounts that are most commonly used to provide context.
A traditional individual retirement account is funded before taxes are paid on the income. This gives you a tax break each year, but on the flipside, distributions are subject to regular income taxes. This also applies to distributions to beneficiaries of traditional IRAs.
You can take penalty-free distributions when you are 59.5 years of age, but you cannot leave the assets untouched until you pass away.
The IRS wants to start collecting some money while you are still living, so there is an age at which you are required to take distributions. It was traditionally 70.5 years of age, but it was raised to 72 in 2020 when the SECURE Act went into effect.
Traditional account holders can contribute into the account as long as they are earning income, and this is another change that came about when the SECURE Act was enacted. Previously, contributions had to stop when a person reached the required minimum distribution age.
Roth Individual Retirement Accounts
Contributions into a Roth account are made after taxes have been paid on the income so distributions are not taxable, and this applies to beneficiaries as well.
You are never required to take distributions from this type of account during your lifetime, and you can contribute into the account for an open-ended period of time.
Penalty-free distributions of the earnings are available to you when you reach the age of 59.5, but you can take distributions of the contributions at any time without being penalized.
Elimination of Stretch IRA
In addition to the SECURE Act changes that we touched upon above, there was another major adjustment that eliminated a very useful estate planning strategy called the “stretch IRA.” Most beneficiaries were allowed to take distributions from IRAs based on the required minimum distribution schedule, which allowed them to stretch the withdrawals (and taxation of traditional IRAs) over a long time.
Now, for most beneficiaries, all the assets must be removed from either type of account in the ten years following the death of the person that originally established the account. (Some beneficiaries, like spouses or disabled or chronically-ill beneficiaries are still allowed to use the required minimum distribution schedule.)
SECURE Act 2.0
On May 5, the Securing a Strong Retirement Act of 2021 (alternately referred to as SECURE Act 2.0) made its out of the House Ways and Needs Committee, and it is on its way to a full vote in the House of Representatives.
It has bipartisan support so there is a very good chance that it will become reality.
One of the changes would increase the required distribution age for traditional account holders yet again. It would go up to 75 years of age if this measure is enacted.
Employers would be required to enroll all employees into their retirement savings plans, but employees would have the right to opt out.
There is a $1000 Savers Credit at the present time, and it is available to low and middle income people who contribute to retirement accounts. Under the terms of the new measure, more people would qualify, and the credit would be increased to $1500.
Some employees cannot afford to contribute to retirement accounts because they are making student loan payments. This measure would give employers the ability to provide retirement account matches for employees who are making qualified student loan payments.
Catch-up contributions for older taxpayers would be increased if this measure is passed. The catch-up limit has been $1000 for people over 50 years old, but the new measure would provide increases to account for inflation.
Another adjustment would allow people over 60 to contribute an additional $10,000 to their 401(k) plans. Currently, the figure is $6500.
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The number in Charlotte, North Carolina and Huntersville, North Carolina is 704-944-3245, and you can use our contact form if you would rather send us a message.