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SECURE Act 2.0 and Other Changes Are in the Works. Here’s What You Need to Know

Published on: Jun 30 2021

Officials in Washington, D.C., are planning to enact a series of laws that will affect your income and estate taxes and will especially affect your IRAs and other retirement plans.

This year could be your best chance to take actions that will maximize the after-tax wealth you and your family receive from retirement accounts.On May 5, the House Ways and Means Committee approved, with-out opposition, the Securing a Strong Retirement Act of 2021, generally referred to as the SECURE Act 2.0.

A version of the law is very likely to pass both the House and Senate by wide margins, just as the original SECURE (Setting Every Community Up for Retirement Enhancement) Act did in late 2019.

Like its predecessor, the SECURE Act 2.0 has many attractive provisions that are designed to make it easier for people to save for retirement and less expensive for small businesses to offer retirement plans to their employees.

I’ll discuss the key provisions.

The catch-up contribution amount for IRAs would be indexed for inflation beginning in 2023, instead of being fixed at $1,000 as it has been for years. A catch-up contribution is an additional contribution amount allowed to a participant who is age 50 or older.

Also, the catch-up contribution limit for employer retirement plans would be increased for employees at ages 62, 63 and 64.

The 401(k) catch-up contribution amount also would be indexed for inflation.Another provision would allow an employer to make matching contributions under a 401(k) or similar plan based on an employee’s student loan payments instead of their 401(k) deferrals.

Members of Congress hope this will help young people begin to accumulate retirement savings while they are paying student loans.Small businesses that don’t have retirement plans would be encouraged to start plans by an increase in the tax credit allowed for the costs of initiating a retirement plan. The employers would be able to take a credit equal to 100% of the plan’s start-up costs up to a ceiling amount, and the ceiling amount would be higher than the current level.

The amount of an IRA that could be invested in qualified longevity annuity contracts (QLACs) would be increased to $200,000 and would no longer be limited to 25% of the IRA value. The annual limit for a qualified charitable distribution (QCD) would be indexed for inflation after 2021.Employers would be required to automatically enroll employees in their 401(k) and 403(b) plans. Employees may opt out of the coverage.

The initial contribution rate for automatically enrolled employees would have to be at least 3% and no more than 10%. If the initial contribution rate is less than 10%, it must automatically increase by one percentage point each year until it reaches 10%. Under its rules, Congress has to increase revenues to pay for these benefits.

One sneaky set of rules is expected to move more people to Roth-type retirement plans instead of traditional plans. This would increase short-term tax revenues. To do this, the SECURE Act 2.0 would allow SIMPLE and SEP IRAs to offer Roth-type plans.

Currently, those plans can be only traditional IRAs.Also, an employee would be allowed to elect that employer-matching contributions made to a 401(k) or similar plan to be treated as Roth plan contributions. The employee would include the employer-matching contributions in gross income in the year the contribution is made.

In addition, when a 401(k) or similar employer plan allows employees to make catch-up contributions, after 2021 all catch-up contributions would be treated as Roth plan contributions. The employee would have to include catch-up contributions in gross income.There also would be changes in required minimum distributions (RMDs).

Individuals with less than $100,000 in all their IRAs would be exempt from required minimum distributions, which is good.But a related provision that initially appears to be a benefit looks to me like a tax trap.

The SECURE Act 2.0 would increase the beginning age for required minimum distributions (RMDs) to 75 in stages. It would be 73 on Jan. 1, 2022, 74 on Jan. 1, 2029, and 75 on Jan. 1, 2032.

The initial draft of the law would have increased the beginning RMD age to 75 for everyone after 2021, but the congressional revenue estimators determined that would cost too much money.

So, the higher RMD beginning age would be phased in.Many traditional IRA and 401(k) owners initially will welcome a delay in the dreaded RMDs.

But those who take advantage of it will fall into a tax trap.When distributions from the IRA are delayed, the IRA will compound to a higher balance. In addition, the RMD distribution tables won’t change.

The percentage of the IRA that must be distributed at the later ages will be a higher percentage than at age 72.The effect will be that the IRA owner will be forced to distribute more from the traditional IRAs and 401(k)s in those years than would be the case under the current rule.

That’s going to result in higher income taxes, more Social Security benefits being included in gross income, and, for some taxpayers, higher Medicare premiums.

It is better for many people to take actions now to reduce future RMDs instead of delaying RMDs as long as the law allows.The changes brought by the SE-CURE Act 2.0 are likely to be coupled with the proposed higher income and estate taxes that are moving through Congress.

The result of all these proposed changes would be that your traditional IRAs and 401(k)s would have lower after-tax values in the near future if you don’t take action soon. The changes are scheduled to take effect after 2021, so you have time to act in 2021.

The strategy I have been stressing since the original SECURE Act started moving through Congress is to reposition your IRA, and that’s still the best strategy. An IRA can be repositioned by converting it to a Roth IRA, a permanent life insurance policy, a taxable account or a charitable trust.

Repositioning an IRA has at least three tax benefits.The first benefit is that you pay taxes at today’s rates. For many people, especially those with valuable retirement accounts, the income tax rates in 2021 probably are the lowest tax rates they will face for the rest of their lives.

In addition, your heirs who inherit the IRAs are likely to pay higher income tax rates in the future when they would be taking distributions than you are today. You’ll be locking in today’s tax rates, and in a few years those tax rates will turn out to be bargains.

The second benefit is that total taxes over the years for you, your spouse and your heirs will be lower. Converting an IRA today means the taxes are paid on today’s IRA balance instead of paying a higher tax rate on a higher future balance after years of additional compounding of investment returns.

You can pay the taxes now at today’s tax rates and IRA balance, or they can be paid in the future at higher income tax rates on higher IRA balances.

The third benefit is that if you convert to a Roth IRA, there is a 0% tax rate on the investment earnings and distributions of the Roth IRA for the rest of your and your spouse’s lives and for the first 10 years after your children or other heirs inherit the account.

There is another benefit for those whose estates might be taxable. Remember that when your heirs take distributions from an inherited traditional IRA, they pay income taxes on the distributions just as you would have. They inherit only the after-tax value of the traditional IRA.

But when you convert or reposition the IRA, you’re paying the income taxes on the traditional IRA balance.

That’s a gift to your heirs, but it doesn’t count as a gift under the estate and gift tax law. So, you are making a tax-free gift by paying the future income taxes of your loved ones.If you reposition the traditional IRA into life insurance or a Roth IRA, the insurance benefits or Roth IRA distributions will be tax-free to your heirs.

That gift of paying taxes also reduces the value of your estate, which could reduce the estate taxes or bring the estate below the taxable level.I have discussed several times in past issues of Retirement Watch the strategies to reposition your traditional IRAs and 401(k)s to reduce lifetime income and estate taxes.

The latest discussion was in the June 2021 issue. You can find others in the Archive in the members’ section of the Retirement Watch website.Many people don’t want to pay taxes until they must.

That’s the short-term strategy. The long-term strategy recognizes that we are in a unique time. Income taxes and probably estate taxes are very likely to increase in the future, especially for those with higher in-comes or net worths.You can estimate the effects of con-verting a traditional IRA to a Roth IRA under a range of different scenarios using my IRA Conversion Calculator. For details, go to and roll your cursor over “Retirement Resources.”

You can take actions today to reduce those future income taxes. Paying some of those taxes now at today’s rates will reduce your lifetime taxes even after considering the time value of money.

Being proactive today and repositioning your IRA and 401(k) before the new tax rules are enacted could increase significantly the after-tax wealth of you and your family.



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