An individual retirement account can give you some additional resources to draw from during your senior years, and if you don’t need the money, it would be part of your estate plan. There were some changes to the IRA guidelines implemented for 2020 due to provisions contained within the SECURE Act.

In October of 2020, a new piece of legislation with bipartisan support was introduced that is being called SECURE Act 2.0. This measure would make additional changes to IRAs and 401(k)s.

We will provide a rundown here, and we will start with a review of the changes that were implemented when the first SECURE Act was enacted.

Required Minimum Distribution Age Increase

Traditional individual retirement accounts are funded with pre-tax income, so you get a tax break each year when you file. On the flip side, distributions are subject to regular income taxes, and you can take penalty-free withdrawals when you are 59.5 years old.

There are a few exceptions to this rule. You can use money in the account to pay for higher education expenses and medical bills. Distributions can be used to cover health insurance premiums if you are unemployed, and you can remove up to $10,000 to help finance a first home purchase.

The Internal Revenue Service wants to start getting some money before you pass away, so you are compelled to take required minimum distributions (RMDs) when you reach a certain age. Before the enactment of the SECURE Act, this age was 70.5, but it was increased to 72.

This measure also gave traditional account holders the ability to contribute into their accounts for an open-ended period of time with no age limit. In the past, they had to stop making contributions when they were 70.5 years of age.

These changes did not impact Roth individual retirement account holders, because these accounts are funded with after-tax earnings. Distributions are not taxed, so there is no reason to force account holders to take required distributions at any time.

There has never been any age limit for making contributions into a Roth individual retirement account.

Elimination of Stretch IRAs

The first SECURE Act made a very significant change to the rules that impact non-spouse beneficiaries of individual retirement accounts.

Beneficiaries of both types of accounts are forced to take requirement of distributions on an annual basis. The amount that they must accept is based on the extent of the resources coupled with the age of the beneficiary.

Before the enactment of the SECURE Act, beneficiaries could take only the minimum that was required by law for any length of time. The beneficiary could stretch out their account until it was exhausted to maximize the tax benefits.

Now, all of the assets must be distributed within 10 years the time of acquisition, so the stretch strategy is a thing of the past.

SECURE Act 2.0

The sequel to the original SECURE Act would raise the required minimum distribution age for traditional account holders to 75. It would also give employers the right to provide individual retirement account contributions that match qualified student loan payments.

Employers would be required to enroll eligible employees into their group retirement account plans, but the employees would be able to opt out. The savers credit for low income participants would go from $1000 to $1500, and more people would qualify for the credit.

401(k) account holders that are 50 years of age and older are allowed to make catch-up contributions that are $6500 over the annual limit. SECURE Act 2.0 includes a provision that would increase this amount to $10,000 for participants that are 60 years of age and older.

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