Your IRA Is About to Get Even Better!
The House of Representatives just passed the Secure Act 2.0. While the Senate has not yet voted, the non-partisan support in the House signals clear sailing for the Bill in the Upper Chamber. Here’s what is in the House version of the Bill.
Required Minimum Distributions from a Traditional IRA or a Traditional Solo 401(k) will increase for the current age 72 to age 75. The increase will come in steps over the next 11 years.
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Increasing the age requirement makes sense as Life Expectancy has continued to increase. For owners of Traditional accounts, delaying the start of the requirement to take distributions will allow your money more time to compound. This provision does not affect Roth IRAs or Solo 401(k)s, as Roth accounts do not have a Minimum Distribution Requirement.
RMD Penalty Decrease
What if you forget to take a minimum distribution? Here again, common sense seems to have crept into the House version of the Bill. The current penalty for forgetting to take an RMD of 50% will be reduced to 25%, with a provision to reduce the penalty to 10% if RMD is taken and reported in a timely manner.
ROTH SEPs and SIMPLEs
For the first time, we will be able to offer ROTH SEPs and ROTH SIMPLE IRAs. This is a tremendous advantage for small business owners and independent contractors. The Roth provision will give small business owners and independent contractors the opportunity to invest for their future and take all their distributions income tax-free!
Higher Catch-Up Contributions
A catch-up contribution is an extra contribution for folks 50 years or older to help grow their IRA account. However, the catch-up contribution is only an additional $1,000 and has not increased for many years. The new provision allows an increased catch-up.
There are a few disappointments in this section of the Bill:
- The amount of the increase is indexed to the rate of inflation. We believe there should have been a one-time large increase to compensate for the years of delay.
- For some reason, the increased catch-up contribution will be available only to folks ages 62, 63, and 64. All others will still have only the $1,000 catch-up limit.
Qualified Charitable Distributions (QCD)
This is a neat tax saving option for people age 70 and over who own a Traditional IRA or Solo 401(k). Making a Charitable Distribution from your IRA without touching you first lowers your Adjustable Gross Income, which can reduce your Medicare Premium, thus increasing your net Social Security Benefit. Currently, QCDs are limited to $100,000/annually. The House version of the Act proposes to index an annual increase to inflation.
Are there any negatives to the Bill? YES. The Bill proposes that all Employer 401(k) plans require a “default” selection when a person leaves their employer. It further proposes that the “default selection” must be to buy an Annuity from an Insurance Company. This is an unreasonable Money Grab by the insurance companies as it takes away a person’s opportunity to thoughtfully shop around for investment options that are best for them and their family. Remember, once you are in an Annuity contact with an Insurance Company, it can be very expensive to get out.
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