Your 401(k) or individual retirement account is supposed to provide income that you can draw from during your retirement years. However, if you do well financially and make some strong moves along the way, you may never need the money.
At that point, your account will fit into your estate plan. The IRS has recently implemented a change that will allow you to keep more money in the account if you have a traditional IRA or a 401(k), and we will explain the details in this post.
Required Minimum Distributions
Contributions into individual retirement accounts and 401(k) plans are made before taxes have been paid on the income. The tax deferral is a benefit, because you pay taxes on less income each pay period.
On the negative side of the coin, the distributions are subject to regular income taxes since taxes have never been paid on the income. The SECURE Act that was enacted at the end of 2019 raised the age at which you are required to take distributions from 70.5 to 72.
Another piece of legislation that has been dubbed SECURE Act 2.0 has been working its way through the legislative process for about a year at this point. It would gradually raise the age from 72 to 75, and we will share new information about the bill’s progress when it becomes available.
Roth Individual Retirement Accounts
If you have a Roth individual retirement account, you deposit money into the account after you have paid taxes on the income. As a result, you do not have to report distributions that you choose to take, and you are never compelled to take required minimum distributions (RMDs).
RMD Calculation Change
Now that we have shared the necessary background information, we can pass along the news about required minimum distributions. The IRS is now using a different formula to calculate the amount that must be taken out of individual retirement accounts and 401(k) plans.
They made this change because the life expectancy for a 72-year-old has increased to 84.6 years. It was previously 82.4 years.
The IRS has created an IRA required minimum distribution table for 2022, and you divide the number that corresponds to your age by the balance of your retirement account. To give you an idea, a 73-year-old person with $1 million in their account would be required to accept $37,736.
Additional SECURE Act 2.0 Changes
In addition to the increase in the RMD age to 75, there are some other significant changes in the piece of legislation that is making its way through Congress.
A provision in the measure would compel employers to enroll employees into their retirement savings plans. Any employee that does not want to participate would have the right to opt out, but they would be automatically enrolled.
Student loans have been in the news over recent years, and a lot of workers with student debt do not contribute into retirement savings plans because they cannot afford to do so. Under the terms of SECURE Act 2.0, employers would be able to provide retirement account matches of student loan payments.
There would also be a catch-up contribution increase for workers that are between 62 and 64 years of age. They would be able to contribute an additional $10,000 into their 401(k) plans each year.
Attend a Complimentary Seminar!
We conduct seminars on a regular basis that cover important elements of the estate planning process. These events are held at comfortable locations around our service areas, and we get a lot of positive feedback from attendees.
There is no charge to attend our seminars, so this is a fantastic opportunity to make a connection with our firm. If you are interested, you can see the dates and obtain registration information if you visit our seminar page.
Need Help Now?
We are ready to spring into action if you would like to work with an attorney to put a plan in place. You can schedule a consultation at our Glastonbury or Westport, CT estate planning offices if you call us at 860-548-1000, and you can use our contact form send us a message.
Mr. McCann is licensed to practice before the courts of the State of Connecticut. He is a member of the American Academy of Estate Planning Attorneys.
Mr. McCann provides to his clients, trust and estate planning, and trust and estate administration services. Formerly, Mr. McCann was an adjunct professor of economics in the State of Connecticut Community College system, and a Commissioner of the Town of Simsbury Zoning Board of Appeals.