On March 29, the House of Representatives voted 414-5 in favor of the Securing a Strong Retirement Act of 2022 (aka SECURE Act 2.0). This type of bi-partisan majority is rare in Washington these days and all but guarantees that more changes are coming to American retirees. The most recent proposed regulations clarify and build upon the changes that were passed into law just three years ago and will have an impact on retirement accounts during the account holders lifetime and to their children and other heirs after they pass. These changes will require a thorough review of retirement income, investment and estate plans to best optimize how retirement accounts are managed during life and at death.
Before jumping into the latest proposed regulations it might be helpful to quickly reflect on SECURE Act 1.0. SECURE Act 1.0 become law "way back" in the pre-pandemic era of December, 2019 and brought about the most significant changes to retirement planning in over 40 years. The most notable changes were:
- It pushed the Required Minimum Distribution (RMD) age from 70 1/2 to age 72. Allowing assets in retirement accounts such as IRAs, 401ks and 403Bs to stay invested for an extra 18 months before IRS mandated withdrawals kicked in.
- It limited the ability of retirement plan beneficiaries to "stretch" withdrawals from the retirement accounts they inherited over their lifetime instead requiring most non-spouse beneficiaries to draw down the inherited retirement accounts within 10 years from the date of the original account owners death.
We wrote about SECURE Act 1.0 when it was passed you can read more here.
If passed by the Senate, and signed into law by the President, the proposed regulations in SECURE Act 2.0 would further push back the start date for required minimum distributions from age 72 to age 73 in 2023, age 74 in 2030 and age 75 in 2033. This would change the retirement cash flow projections for many retirees. For those with large retirement account balances it could extend a period of time post-retirement where income remains relatively low before hefty RMDs kick in and boost you into another tax bracket. The opportunity could be to execute a ROTH conversion strategy during the low income period to mitigate the tax on withdrawals in your later years those that will ultimately be paid by your IRA beneficiaries.
Speaking of IRA beneficiaries...SECURE 2.0 seeks to clarify the rules about the 10 year withdrawal period for inherited retirement accounts that was introduced in 2019. After 1.0 became law most advisors and CPAs interpreted the rules to mean that you were not required to take regular withdrawals from the inherited retirement account, you were only required to deplete the account 10 years from the date of the original owners death. This interpretation gave the person inheriting the account the ability to selectively withdraw (and pay the associated taxes on the withdrawal) in the years of their choosing. However, the proposed regulations clarify that if the original owner was beyond the RMD age when they passed (ie. over age 72 under current law) then the person inheriting the IRA would have to take a minimum amount every year AND would still have to deplete the account by the end of the 10th year. For beneficiaries of IRA accounts these mandates on withdrawals could have a lot of different impacts on their own financial planning. Some examples are:
- It could limit the amount of financial assistance they qualify for when sending a kid to college,
- If on an income based repayment plan for their own student loans it could increase the amount they are required to pay,
- If they own a small business doing work with the government it could impact their ability to meet the Small Business Associations (SBA) definition of economically disadvantaged.
- If already in a high tax bracket it could push them into an even higher tax bracket and cause more of the inheritance to be lost to taxes
* Note the 10 year withdrawal requirement does not apply to surviving spouse beneficiaries, disabled individuals, chronically ill individuals, beneficiaries within 10 years of the original account owner or minor children.
In addition to those highlighted above, there are many other new rules and clarifications that are less common or beyond the scope of this initial article. The proposed regulations will move to a public comment period and then to the Senate where the provisions will be voted on and likely amended before going back to the House. It's still too early to know exactly what any final regulations might look like but the bi-partisan support gives a good indication that changes will likely be passed by the end of the year.
The bottom line is the proposed regulations in SECURE Act 2.0 will further complicate wealth accumulation, distribution and transfer strategies and are likely just the tip of the iceberg when it comes to policy changes aimed at addressing the countries aging demographics and bulging levels of debt. It has never been more important to understand how you might be impacted whether you are an account owner or someone that stands to inherit a retirement account.
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