The Insecure 2.0 Act?

On December 20th, 2019, former President Donald Trump signed the Further Consolidated Appropriations Act, which included the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019. SECURE 2019 made changes that applied to retirement savings and employee benefits. 

Prior to SECURE, when individuals reached age 70.5, they were required to begin taking annual distributions (starting roughly at 5% of the account balance) known as RMDs (Required Minimum Distributions) from their IRAs (Individual Retirement Accounts). RMDs are based on age (mortality) meaning a 70-year-old must take 5% and the percentage goes up every year as life expectancy goes down. At 80 years old, the distribution must be 10% of the account, and so on.

Under SECURE 2019, the age for one to begin taking RMDs has increased from age 70.5 to age 72. Increasing the RMD age allows retirement funds to continue to grow tax-deferred for a longer period of time. This applied to Americans who turned 70.5 after December 31st, 2019, and those who have a 401(K), 401(A), 403(B), government 457(B), and or a traditional IRA. 

Whenever a new bill is passed that seems to benefit the public, I usually like to analyze and understand the opposite point of view, meaning how does the government benefit by allowing the public to grow our IRA, etc. for 2 more years from age 70 to 72? It is clear to me that our government wants us to save more money for our own retirement, so we don’t go broke and be forced to depend on government-funded Medicaid funds for medical expenditures.

The insurance industry is not much different. As an independent insurance advisor/broker, I/my firm represents YOU, the client, and we research over 100 insurance companies tracking over 2000 products to shop the market to find the best available products at the best prices for YOU, the client, to choose from. We often find “pricing sweet spots” where one insurance carrier might be much less expensive that the others in a particular age bracket. Insurance companies are often releasing new products and sometimes discontinue old/previous products. When insurance companies discontinue one of their product offerings, we know that the product was “TOO Good” for the client and not priced high enough, meaning it is/was not profitable enough for the company. 

While the SECURE Act of 2019 helped seniors save for retirement with IRAs and other “qualified ‘pretax’ accounts,” there were subtle changes that have hurt estate planning, meaning the process of passing down assets to our children and grandchildren by deferring or avoiding taxation.

The biggest rule change was the introduction of the 10-year rule! Prior to the 2019 SECURE Act, if you had an IRA account that you left to your children, those children (beneficiaries) were able to stretch (we called this the Stretch IRA) the IRA distributions out over their lifetimes. Now, they must withdraw 100% of the account by the 10th year of their parent’s death!

Let me repeat these changes below and what it means to your family:

1. The Inherited IRA Account Must Be Depleted Within 10 Years! 
2. No IRA Money Left for Grandchildren (assuming children live for 10 years and receive ALL of the proceeds, which are 100% taxable).
3. Inherited TRUSTS That Need to be Reviewed: Inherited IRA accounts “In Trust,” now need to be FULLY PAID OUT by the 10th anniversary of the IRA holder’s death. These trusts need to be looked at and possibly rewritten!

The SECURE Act of 2019 seems to be one of the few issues that former President Trump and current President Biden somewhat agree on. If Biden didn’t agree, he would have tried to repeal the SECURE Act of 2019 instead of adding to it. 

The SECURE Act 2.0 was quietly signed into law by President Joe Biden on December 29th, 2022, as part of the Consolidated Appropriations Act of 2023. The SECURE Act 2.0 adds many additional enhancement provisions to the SECURE Act of 2019. 

Some of the new changes include:

1. Increase in Age for RMD Distributions: The new required age to start making taxable withdrawals moved from age 72 to age 73, which increases to age 75 after December 31st, 2032. 
2. IRA Catch-Up Contributions Indexed for Inflation: Beginning in 2024, IRA catch-up contributions will be indexed for inflation. 
3. Penalty-Free Withdrawal Exceptions from Retirement Plans: Terminal Illness. If an individual is diagnosed with a terminal illness (expected to live less than 84 months) there will be no premature distribution penalty. 
4. Higher Employer Retirement Plan Catch-Up Limits: Effective in 2023, retirement plan catch-up contributions rise to $7,500 for those aged 50 and higher. 
5. Rollovers of Long-Term 529 Plans to Roth IRAs: Effective in 2024, for eligible 529 plans, (must have been open for at least 15 years) up to $35,000 (per beneficiary) can be rolled over into Roth IRAs.  

           The SECURE and SECURE 2.0 Acts are important rule changes to be aware of and planned for. Individual tax returns are due on Tuesday, April 18th (the 15th is on a Sunday). This is a critical time to huddle with your CPA and other advisors to see how you can take advantage of the positive retirement rule changes.