Your individual retirement account can be drawn upon during your retirement years, and if you do not spend all the money, it will be part of your estate plan. We will look at the details here, and share information about a change that will have a positive impact in 2022.
Traditional Individual Retirement Accounts
When you have a traditional IRA, you get a tax break each year. This is because your contributions reduced your taxable income. That’s the good news. The bad news is that the taxes are going to be due when you take distributions.
You can start to accept penalty free distributions when you are 59.5 years old. You cannot, however, leave the assets untouched for your entire life. When you are 72 years of age, you have to take the required minimum distributions (RMDs).
The RMDs are based on your life expectancy, and life expectancies for senior citizens have risen over recent years. As a result, the Internal Revenue Service has adjusted the RMD calculation formula. Today the mandatory distributions are lower than they have been in the past.
Roth Individual Retirement Accounts
There is an entirely different tax structure for Roth individual retirement accounts. You do not pay taxes on your distributions. You already paid taxes on the earnings you contributed to your ROTH IRA account.
Therefore, neither you, nor the beneficiaries of your Roth accounts are required to report the income.
You are required to take distributions from a traditional IRA accounts because no taxes have been paid. Lawmakers want the IRS to start collecting at some point while the account holder is still alive. This dynamic does not apply to Roth accounts because the taxes have already been paid.
Parameters for traditional retirement accounts changed when the SECURE Act was enacted at the end of 2019. Prior to its enactment, the RMD age for traditional account holders was 70.5. After the enactment, the RMD went up to 72 as we have stated.
Contributions into traditional accounts had to come to an end when the account holder reached the mandatory minimum distribution age. Under the SECURE Act, you can continue to contribute into your traditional account as long as you are earning income.
The other major change affected holders of both types of accounts. Before the enactment of this measure, estate planning attorneys would recommend the “stretch IRA” approach. Attorneys advised beneficiaries to take the minimum required for the maximum length of time.
Prolonging the viability of the account would enable the beneficiaries to take full advantage of the tax benefits. Now, you must clear all the assets out of either type of account within 10 years.
SECURE Act 2.0
The Securing a Strong Retirement Act was introduced into the House of Representatives last year. It is still making its way through the process. This measure is alternately referred to as “SECURE Act 2.0” because it makes further changes to the IRA parameters.
The SECURE Act 2.0 would require employers to enroll all eligible employees in their 401(k) plans. If this bill becomes law, employees would be able to opt out if they do not want to participate.
The required minimum distribution age for traditional account holders would go up to 75, but the change would be incremental. For employees who make qualified student loan payments, employers could make equal contributions to the employee’s 401(k) plan.
There is a savers credit for low-income workers, and it would go from $1000 to $1500, and more people would be eligible. Another change would provide a $10,000 increase in the catch-up contributions for older workers.
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