On Jan. 1, 2020 the Secure Act became law.
It made some major changes to retirement planning. This legislation had wide bi-partisan support because Congress recognized that many people were not saving enough money for retirement. Baby Boomers are the first generation in decades where most people did not receive a pension.
Now, almost a year and a half later, let’s see how things have gone. One of the goals of the bill was to get more people to participate in employer retirement plans. It made people opt-out of plans instead of opting-in. This meant you had to tell HR if you did not want to participate instead of saying you wanted in. As expected, this has been very successful.
The Secure Act also changed the age to start taking required minimum distributions (RMDs) from 70 1/2 to 72. This was a good change as it helped keep unneeded money from being taken from couple’s retirement accounts. This would leave more to help cover lower income at the death of the first spouse. There is a new Secure Act 2.0 now being debated in Congress which has not yet become law. The proposal would increase the RMD age to 73 for people who turn 72 from 2022-2027. There would be additional increases built in for younger workers. This could help people make Roth conversions. By law, you cannot take RMDs and convert those funds to a Roth. You also must take RMDs first before doing any conversion.
Many people do not realize that there is no statute of limitations for IRA penalties. So, theoretically, you could miss an RMD today and the IRS could come back in 20 years and assess the penalty and interest. This is because penalties get reported on their own Form 5329 and the IRS and Tax Court have previously agreed that this form is its own return. Therefore, if you have not filed this, the clock has not started statute of limitation. Normally the IRS looks at returns up to three years old. Secure Act 2.0 might end this situation as it would start the clock when the 1040 was filed for the year in question. Version 2.0, as proposed, would reduce the penalty for missed RMD penalties’ from 50% to 25%.
It does not appear the proposal will change the biggest drawback to the original law. So far there has not been an effort to reinstate the inherited or stretch IRA. This was a planning strategy where someone who did not need to spend qualified money could leave it to non-spousal beneficiaries who would withdrawal it over their life expectancy. This could increase the value of this asset for some families.
While Secure Act 2.0 has not passed, it is very important to have an estate plan that is up to date with changes to the law and to your family situation. If you do not do so, you may pay more taxes than necessary and put unnecessary burdens on your family.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.