One of the few pieces of legislation that is being pursued during this Congressional lame duck session is an update to the Secure Act, which was originally passed in December of 2019. Dubbed the ‘Secure Act 2.0,’ this legislation carries a whole array of changes to the world of retirement accounts.
The act’s acronym stands for, “Setting Every Community Up for Retirement Enhancement,” but after a review of the first round of this legislation, it looks like “Setting Every Community Up for Robbery of Estates” would be a better fit. The legislation has eliminated what was known as the ‘stretch IRA’ – which allowed IRA beneficiaries to ‘stretch’ their IRA’s tax benefits over their lifetime.
Obviously, there were a few bones thrown in to support the legislation’s claim to ‘enhance retirements.’ The smoke screen created by titling this act in a positive way isn’t as egregious as it was for the Inflation Reduction Act, but it’s not far from it.
In the new version of the act, currently being deliberated by the offices of Congresspeople and various lobbying groups, there are north of thirty changes. However, though few of these changes will impact the act substantially, there are some minor provisions that are notable.
One of the changes being proposed is a positive one. It will allow employers to contribute – either through a match or a non-elective deferral – as a Roth contribution.
Currently, 401(k) plans can allow participants (i.e., employees) to contribute as a Roth contribution, but the company match and non-elective deferrals need to go into the plan as a pre-tax contribution. Also included in the proposed legislation is a provision allowing Roth accounts in SEP-IRAs.
So why is this exciting? Simple. ROTHs allow you to buy out the IRS for future taxation.
Picture this: You have a partner in a business who, without your consent, is entitled to decide at any time what his share of the business consists of. Wouldn’t you want to rid yourself of him and buy him out? With a pre-tax 401(k) or IRA, the IRS remains a silent partner that can walk in one day asking for its share of your money. If it decides that tax rates are 50%, then you have no choice but to comply.
When deciding to utilize a pre-tax or a Roth account, many people try to calculate what their current tax rates are as opposed to their future expected tax rates in retirement. The problem with this reasoning is that nobody really knows what tax rates will apply in the future.
Based on where our national debt is and the trillions in untapped resources for IRS retirement accounts, we don’t think it’s a bad idea to buy out this bossy partner. So, although we need to live with some of the negative clauses in this legislation, make sure to also glean some of the benefits as well.
Are you setting yourself up for retirement success? If you’re not sure, reach out to us at info@equinum.com for professional guidance.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
