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The Setting Every Community Up for Retirement Security Enhancement (SECURE) Act was enacted in December of 2019. It impacted some of the guidelines for individual retirement accounts.
Last year, a follow-up measure that has been dubbed SECURE Act 2.0 was introduced. A House version was finally passed on March 19 of this year. It moved on to the Senate, and the Finance Committee approved half of the Senate version on June 22. This measure is formally called the Enhancing American Retirement Now (EARN) Act.
Earlier in June, the Senate Health, Education, Labor and Pensions Committee passed the RISE & SHINE Act. It contains different related provisions, and the two measures will be merged to produce the final SECURE Act 2.0.
What does all this mean to you in a practical sense? Let’s look at the details, starting with a review of the original SECURE Act that has already been enacted.
Traditional Individual Retirement Accounts
Traditional IRAs are funded with pretax earnings, and Roth accounts are funded after taxes have been paid on the income. The most significant change that was implemented via the SECURE Act impacted traditional accounts only.
These account holders are compelled to take required minimum distributions (RMDs) when they reach a certain age. This stipulation is in place because traditional account contributions are made before taxes have been paid. The RMDs generate tax revenue.
Prior to the enactment of the SECURE Act, the age was 70.5, but it was increased to 72. Another change gave traditional account holders the freedom to continue to contribute into their accounts indefinitely. Before the Secure Act, no contributions could be made after an account holder reached the RMD age.
Elimination of Stretch IRA
A major SECURE Act provision with estate planning implications impacted both types of accounts. Non-spouse IRA beneficiaries have always been required to take mandatory distributions. The required distributions were calculated based on the age of the beneficiary.
The beneficiary of a well-funded account could take only the minimum that was required by law for the maximum amount of time. In so doing, they would take full advantage of the tax benefits. Now, an inherited account must be closed within 10 years of the time of acquisition.
Possible SECURE Act 2.0 Changes
Since multiple measures are going to be merged to create the final version of SECURE Act 2.0, the details are still being ironed out. However, we can look at some key provisions that are contained in the EARN Act.
This bill includes another increase in the required minimum distribution age for traditional account holders. It will gradually go up to 75 over a number of years.
Many workers with student loan bills feel as though they cannot afford to contribute into 401(k) plans at work. As a response, this measure would give employers the ability to provide 401(k) matches of qualified student loan payments.
There are a couple provisions that apply to catch-up contributions for older workers. Under the terms of this measure, these contributions for people 50 years of age and older can be made as Roth contributions after 2023. Savers that are between 60 and 63 years of age will be able to contribute an additional $10,000 in catch-up contributions.
Another change would apply to part-time employees with a minimum of 500 hours of service in two consecutive years. Employers would be compelled to allow these workers to participate in their 401(k) plans.
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