The House passed “SECURE 2.0’ on March 29 – Now It’s Up To the Senate

The other day, we sent out information about the SECURE Act and your estate plan. Now the law is on the verge of changing again.

The Securing a Strong Retirement Act (H.R. 2954), known as the SECURE Act 2.0, was approved in the House on March 29 with the most bipartisan approval in recent memory – 415-5. Now it’s headed to the Senate.

A significant change is the age when Required Minimum Distributions (“RMDs”) commences. This may seem odd since Congress is usually looking for tax revenue generated by RMDs. The legislative report says raising the age for RMDs recognizes the increased life expectancies in America. Starting in 2022, you must take distributions beginning at age 73, 74 in 2029, and 75 in 2023. Before the first SECURE Act, the age was 70 ½.

The intent of the SECURE Acts is to increase the ability of Americans to save for a secure retirement. Those are the bold strokes. Expanding coverage, increasing retirement savings, simplifying the retirement system (which is maddeningly complex), protecting Americans and their retirements. Does it accomplish this?

It depends on your situation.

One provision requires employers to automatically enroll eligible workers in 401(k) plans at 3% of salary, which increases to 10%. The employees may opt out, but studies show the chances of an employee saving for retirement as an automatic opt-in is higher than if they have their own savings plan.

Government studies show that only about half of all private-sector workers participate in the retirement plans at work.

Younger workers with higher wages will benefit; the average worker struggling to pay bills will not likely see this as an advantage.

Another advantage for young workers is electing all or some of their employee matches into a Roth 401(k).

For small business owners and nonprofits, provisions in the bill contain inducements to help them with the start-up costs of offering new plans. Another provides tax credits for matching worker contributions.

For part-time employees, a way of life for so many Americans today, access to a retirement savings plan from their employer would be required after two years of service instead of the three-year requirement.

An increase for older workers near retirement allows people ages 62-64 to make catch-up contributions of $10,000 annually. The current limit is $6,500.

The bill includes four revenue-raising provisions to offset costs over the next decade, most of which would take effect in 2023. The biggest offsets would mandate any employee catch-up contributions for employees over age 50 who contribute to Roth-style accounts. Employees may put employer matching contributions into the Roth-style accounts instead of traditional tax-deferred retirement accounts.

Roth accounts are robust savings accounts for the future. They are funded with after-tax contributions, and then withdrawals are not taxable. More Roth-style accounts would mean more revenue in the near term for the federal government. Still, they would also mean less future revenue. The cost of these provisions may become burdensome over the life of the ten-year budget window.

Two bills are pending in the Senate with similar provisions. Will the SECURE Act 2.0 will make it through the Senate? Stay tuned.

Should You Change Your Estate Plan Because of the SECURE Act?

Here’s another reason estate planning is not a one-and-done event. For most people, life is constantly changing. But the laws around estate and tax planning are also changing. Starting in 2022, a new rule, part of the SECURE Act of 2019, may affect estate plans from 2022, especially for those beneficiaries of an IRA or qualified plan, such as a 401(k).

IRAs are a significant source of America’s retirement wealth, and it was just a matter of time before Congress figured out a way to hasten their distribution to collect taxes on this asset. As these changes continue to develop, the accelerating taxation of IRAs becomes more attractive to Congress as a source of revenue.

The Setting Every Community Up for Retirement Enhancement Act, a/k/a the “SECURE Act,” became law on January 1, 2020. The intent was to boost retirement options for employees and make it easier for employers to offer retirement plans to their employees. The new law also changed how estates work, and both estate planning attorneys and our clients need to address these changes in estate plans. I’ve written about this in the past. New facets of the law continue to evolve, and this one may be crucial to many of you.

The SECURE Act ended the use of a “Stretch IRA.” The Stretch IRS allowed beneficiaries to take distributions from an inherited IRA based on their life expectancy. It allowed the bulk of the IRA funds to remain in the tax-deferred retirement account for decades.

After the SECURE Act, heirs must empty IRA accounts within ten (10) years of the original owner’s death. The initial universal understanding of the SECURE Act was a beneficiary could withdraw any amount during the ten years or wait until Year 10 and withdraw the entire balance. In either case, the beneficiary paid income tax on any distribution. Two weeks ago, the IRS issued temporary regulations that let us know everything we thought we knew was wrong.

If the IRA owner dies before age 72, the age Required Minimum Distributions (“RMD”) must begin, the ten (10) year distribution rule remains the same. However, had the account owner already turned 72, the beneficiary must take an RMD as if the account holder was still living and empty the account balance by the 10th year.

Our estate planning law firm is now working with many clients who came to us with large IRAs and are concerned about its impact on their heirs. Their tax picture has changed, and it may have changed for you.

We can no longer push back the taxes due on the inherited IRA for ten years if the IRA owner lives after 72. Children and grandchildren will face a significant income tax liability. Our job is to help clients plan properly to mitigate these results.

One way is to convert the IRA to a Roth IRA. With a Roth IRA, the account holder pays the income tax during conversion, so beneficiaries need not worry about the income tax liability of their inheritance. There are other benefits to a Roth conversion. The IRA owner need not take RMDs during their lifetime. Also, if the estate of the IRA owner is taxable, payment of income tax by the IRA owner reduces their taxable estate.

There are other ways to address this change, including the use of trusts. If you have an IRA and anticipate passing it down to the next generation, we invite you to contact our office to discuss how to protect your heirs from these changes and align it with your estate plan.

This new IRS interpretation of the SECURE Act significantly affects how inherited IRAs work. If the person who dies is already 72, the RMD will now apply to the inherited account for ten years. After the ten years have passed, the remaining balance of the IRA and pay the income tax.

Several other options can reduce the estate tax, income tax, or both. Don’t hesitate to contact our office if you wish to explore your options.

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Happy Groundhog Day

Happy Groundhog Day – Is Your Estate Plan in a Time Loop?

If you wake up every morning thinking that you need to get your estate plan updated, or worse, created, you might feel like Bill Murray in the classic movie “Groundhog Day.” Actually, a lot of days in 2020 felt like Groundhog Day: a never-ending time loop of working from home, dining at home, working out at home, visiting with friends and family from home, etc.

There’s a way to get out of an estate plan time loop, and it won’t require you to go through endless mornings with a clock radio playing The Beatles’ “Tax Man” song.

If you have been putting off updating your estate plan, it’s time to get it done.

Your estate plan is at risk if it is out of date.

If your estate plan has not been updated since before the Tax Cuts and Jobs Act (TCJA) of December 2017, there may be estate planning opportunities that you are missing.

If your estate plan has not been updated since the SECURE Act went into effect in December 2019, there may be missed opportunities. There is still time to benefit from the changes.

If you are waiting to see what changes are coming from the new administration and the Democrat-controlled Senate, this is not the time to procrastinate. Whatever changes may be coming in the future are exactly that—in the future.

The new administration and Congress have many large issues to tackle immediately, from addressing a global pandemic to responding to domestic terrorists. President Biden did propose changes during his campaign, including eliminating the basis adjustment for assets and making changes to the federal estate tax exemption, which is likely to change before the planned sunset of 2025.

But there is an exceedingly long stretch between the time a campaign promise is made and what actually becomes law.

Negotiations with the House and Senate, efforts by lobbying groups and the White House staff, take time. And while you are waiting for the law to change, your estate plan may put you or your loved ones in a precarious position.

If your estate plan is stuck in Groundhog Day, call our office at 516-307-1236 and make an appointment to meet with us by phone, video conferencing or in the office. We can get your estate plan updated, and get you out of the time loop. Eventually, Bill Murray got to tomorrow in “Groundhog Day, and the same can happen for your estate plan.