There is a piece of legislation that has been dubbed “SECURE Act 2.0” that would make significant changes to the individual retirement account guidelines. It is formally called the Securing a Strong Retirement Act of 2021, but it is a follow-up of the original SECURE Act.
This measure has recently cleared the House Ways and Means committee, and it has bipartisan support, so there is a good chance that it will become law. In this post, we will highlight the key provisions in this legislative measure.
But first, we will provide a brief review of the changes that have already been implemented.
SECURE Act Changes
Two of the most important elements of the SECURE Act affect traditional retirement accounts, but they had no impact on Roth accounts. A traditional IRA is funded before taxes have been paid on the earnings, so distributions are taxable.
A Roth account is funded in the reverse manner, so account holders receive distributions tax-free. With either type of account, you can take distributions of the earnings without being penalized when you are 59.5.
When it comes to penalty-free distributions of the contributions, there is no age threshold for Roth account holders, but traditional account holders have to wait until they are at least 59.5 years old.
Prior to the enactment of the SECURE Act, traditional account holders were required to take mandatory minimum distributions when they were 70.5 years of age. Roth account holders are never required to take distributions.
A provision in the SECURE Act raised this age to 72, and another adjustment gave them the ability to continue to contribute into their accounts after they start taking mandatory distributions.
In the past, contributions had to stop when the account holder reached the age of 70.5. Roth account holders have always been allowed to contribute into their accounts for any length of time.
The most significant change from an estate planning perspective impacts both types of accounts. A non-spouse beneficiary is required to take mandatory distributions, and this applies to both traditional and Roth accounts.
Before the SECURE Act came along, the beneficiaries could stretch out the distributions for as long as possible to maximize the tax benefits. Now, all the assets must be cleared out of either type of account within 10 years.
Securing a Strong Retirement Act of 2021 or SECURE Act 2.0
Now we can look at the additional changes that are on the table. One of them would be another increase in the required minimum distribution age for traditional account holders. Under the terms of this measure, it would go up to 75.
Employers would be required to automatically enroll employees into their retirement savings plans. If an employee wants to opt out, they would have the ability to do so.
Some people that have to make student loan payments can’t afford to contribute into retirement accounts. This measure would allow employers to provide retirement account matches of qualified student loan payments that are made by their employees.
Low-to-middle income earners that contribute into retirement accounts can claim a $1000 Savers Credit when they file their taxes. SECURE Act 2.0 would increase the credit to $1500, and the income cut-off would be lowered to include more taxpayers.
The catch-up contribution for older workers would also increase. People over 50 have been able to contribute $1000 more than the maximum for others, but this was established in 2006. This piece of legislation would index the catch-up contribution to account for inflation.
Plus, people that are in their 60s would be able to add an additional $10,000 to their 401(k) accounts.
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