Earning Passive Income Through a Self-Directed IRA

Earning Passive Income Through a Self-Directed IRA

Work, work, work; it’s the way we earn income to sustain ourselves. However, earned income isn’t the only way to support your lifestyle. Passive income—a sort of “set it and forget it” income stream—can be attained through the alternative assets that can be held in a self-directed IRA.

A peek at passive income
The way passive income functions is that you do the upfront work to get an income-producing entity launched that will return a continual income stream down the line. Many people have done this by setting up online courses people can download, writing a book for sale, creating portfolios of their creative work (paintings, photography, handiwork/crafts) to sell on an e-commerce platform or their own website, and renting out a prime parking space or a swimming pool they’re not using (yes, the swimming pool rental is a real thing!).

Another way to create long-term income: passive investing.

Passive investing through self-direction

Passive investing is a buy-and-hold strategy and is typically a long-term path for building retirement wealth.

A self-directed IRA provides numerous avenues for passive investing and for taxpayers to earn passive income over the long-term. Self-directed investing through alternative assets requires upfront research and due diligence on the part of the investor; after that, they are low maintenance because they typically don’t require active involvement on the account owner’s part once the investment is made. That said, as with any investment, they do require monitoring to ensure they are delivering positive ROI. The IRS also requires that you provide your self-directed IRA custodian, like Next Generation, an annual Fair-Market Value (FMV) of any assets held within your account.

Some examples of passive investments that can be held in a self-directed IRA include:

Getting started on passive investing with a self-directed IRA

If you already have a self-directed IRA, you’re well on your way to building a more diverse retirement portfolio—one that can include passive investments in a range of alternative assets.

For investors who are getting started on self-directing their retirement accounts, Next Generation is here to help. Need more information? Contact us today.

Why Financial Advisors are Adding Alternative Assets to Clients’ Portfolios

In the last two decades, investors have dealt with periods of intense market volatility and this year, a high level of inflation is adding to investor woes.

Although financial advisors have historically stuck with more traditional investments (stocks, bonds, mutual funds) and the occasional foray into hedge funds, alternative assets—like those allowed in a self-directed IRA—are gaining favor with financial advisors who seek to diversity their clients’ retirement portfolios.

The bottom line: Including alternative assets enables advisors to work more responsively with clients’ investing goals, and align certain investments with their risk tolerance, age, and timeline to retirement with greater creativity and variety.

Benefits of diversifying with alternative assets

Financial advisors are seeing more and more that including nontraditional investments that are not tied to interest rates, nor correlated with stock market performance, offer a hedge against volatility and a buffer against inflation.

A recent survey from Cerulli Associates of 100 advisors revealed average alternative allocations of 14.5% during the first half of 2022; advisors reported they want to boost percentages to 17.5% in two years. The industry average for alternative allocation (such as real estate, commodities, and private equity) is closer to 10%.

Recommending that they include alternative assets in their retirement portfolios enables advisors to be more effective with their clients and develop more personalized retirement strategies.

They can guide clients towards asset classes that they are interested in or know a lot about. And for those clients who are already investing in alternatives outside of their existing retirement plan, advisors can show they “speak their language” and build a stronger relationship.

Alternative assets and self-directed IRAs

Alternative assets are typically long-term, offer greater investing flexibility, and are somewhat protected from the macro trends of the stock and bond markets.

They enable individuals to invest along their personal interests, such as shares in a theatrical production, a coffee plantation, or a biotech startup. And when held within a self-directed IRA, the assets grow in a tax-advantaged account, which benefit the investor in the long run.

Although they may consult a trusted advisor regarding asset allocation, typical self-directed investors are those who are comfortable making all their own retirement decisions and conducting their due diligence about these nontraditional investments.

And while the self-directed IRA custodian/administrator, like Next Generation, does not sell or endorse any investments, the individual’s financial advisor can serve as a reliable sounding board when exploring the many options available through self-direction.

Next Generation is here to help

Next Generation is here to help self-directed investors and their advisors understand more about how self-directed IRAs work and share information about the types of investments allowed in these plans.

Need more information? Contact us today.

Private Equity is Popular Among Billionaires . . . and Among Self-directed Investors – Here’s Why

According to a recent article on Bloomberg.com, there is some concern about the future of private equity (PE) investing. The author cited fewer initial public offerings, hesitation by banks to give buyout loans, and pension and endowment funds allocating less money to PE as an asset class (due to a selloff of global stocks and bonds). All these factors are contributing to fewer deals in terms of buying and selling companies.

However, PE is now attracting ultra-high-net-worth family offices and retail investors. Billions are being invested in venture capital funds and a survey by UBS revealed that among the biggest family offices with an average of $1.2B in assets each, 21% of their money was allocated into PE.

Why PE?
The family offices are seeking to boost returns and are seeking to broaden their asset allocation in alternative assets.

The UBS survey also showed that among respondents, 85% said they’re likely to invest early-stage companies this year, up from 74% in 2021. And about 75% of these billionaire families believe private equity will continue to outperform public markets. Plus, 51% plan to increase their asset allocation into direct PE investments and 44% plan to do so in PE funds within the next five years.

Private equity and self-directed IRAs
You don’t need to be a billionaire to include private equity as an alternative asset within a self-directed IRA. Private equity funding is growing in popularity among self-directed investors—especially since the SEC broadened the criteria regarding accredited and nonaccredited investors with full passage of the JOBS Act. This enabled a wider pool of investors to add private equity funding part of their self-directed retirement plans.

And given the volatility of the markets today, savvy investors seeking to diversify their retirement portfolios—and create a hedge against both inflation and market volatility—are looking at private equity as an alternative asset class that can enhance portfolio returns. As we’ve written in a previous post, self-directed investors can include the following PE investments:

These are all non-publicly traded assets which qualify them for inclusion in a self-directed IRA; however, PE investments—like many nontraditional investments allowed through self-direction—are often illiquid and should be considered as a longer-term investment.

One clear benefit of PE investments is that returns they deliver do not necessarily correlate with markets. So, while traditional investors are worrying about stocks and bonds on the decline (or slow to rebound), PE investors are helping early-stage companies or those seeking growth capital to thrive.

Are you adding private equity to your self-directed IRA? Next Generation can help.
Remember that as with any alternative asset held in a self-directed IRA, you as the account owner are responsible for preforming thorough due diligence on any potential PE investment, and you make all the investment decisions regarding the account. Your trusted financial advisor can offer insights into how adding PE investments may affect your tax picture or help you reach your retirement savings goals.

Need more information? Contact us today.

Achieving Financial Freedom Through Self-Direction & Alternative Assets

We don’t need to hammer home the concerns about inflation in the U.S. (actually, worldwide)—we are all seeing rising prices on products and services everywhere, and for many Americans, their paychecks don’t cover as much as they used to. According to Bloomberg, inflation hit a 40-year high in May with a consumer price increase of 8.6% over last year.

Add to that the terrible stock market performance we’ve been witnessing since the beginning of 2022, made worse by world events (and inflation). For people nearing retirement or those that are already retired, they’ve seen their retirement portfolios decline steeply over the past six months and market corrections or a quick fix are not on the horizon.

According to a CNN report in May, the stock market “meltdown” resulted in more than a $7 trillion decline in market value from the blue chip stocks in the S&P 500. The index at that time was down nearly 18% since the end of December.

CNBC reported more bad news in June, with the S&P falling to its lowest level since March 2021, bringing with it 21% losses from its January record. The Dow Jones Industrial Average has dropped (down 17% from its record high) as has the Nasdaq Composite by several percentage points (with 33% losses during this sell-off period). Treasury bond prices are dropping as well. All this is fueling recession fears.

With retirement savings in peril and the Fed trying to curb inflation, many people are feeling stuck. They are wondering how to invest to protect their retirement savings against the current market storm—and create a brighter future in their retirement years.

How alternative assets can help steady your rocking investment boat

With all this market volatility, investors may be feeling a bit of despair (we don’t blame them). And while many people understand that where there’s knowledge there is power, others might not realize the power that investing in alternative assets through self-direction can add to a retirement portfolio. Here are some of the benefits:

  1. Self-direction allows for a broad array of nontraditional investments—far broader than stocks, bonds and mutual funds. Savvy investors are including various sectors of commercial and residential real estate, precious metals, private equity, among others, in self-directed IRAs, and taking advantage of investing opportunities that arise in the asset classes they know and understand.
  2. The nontraditional investments allowed in a self-directed IRA have a low correlation to how other asset classes perform. So, while the stock market may tumble, an investment in mineral rights or music royalties can deliver unrelated returns. And real estate can be a lucrative option when done right.
  3. Alternative assets allow investors to fulfill on their ESG goals for environmental, sustainable and governance investments more nimbly and directly than through traditional funds.
  4. Self-direction enables investors to take advantage of “in the moment” investment opportunities and changing market conditions. For example, the supply chain issues the world has been dealing with since the start of the pandemic have opened opportunities to invest in transportation assets.

In short, alternative assets provide a hedge against market volatility while also helping investors develop a more diverse portfolio and offering inflation protection and yield. Additionally, the more you know about a specific asset class, the better chance you have at controlling (or increasing) your return.

Risk-reward

Imagine you’ve done your research and decided that investing in self-storage or senior housing—both growing real estate sectors—makes sense for your goals. Or you like the idea of investing in renewable energy assets, timber, or infrastructure sectors. All these are possible through self-direction.

Of course, there are risks with alternative assets as there are with any type of investment, but self-directed investors are comfortable making their own investment decisions; conducting their research and due diligence on the assets; and generally enjoy taking a more active—and proactive—approach to building their retirement wealth. They understand the nontraditional investments they are including in their self-directed retirement plan can have strong ROI. And they like the control they have over their investments and their future.

Investing in alternative assets in a self-directed IRA can create a powerful path to financial freedom. Self-directed investors have more avenues for beating back the hazards of inflation and stock market volatility. And they have more paths to take for investing in what matters most to them.

Need more information? Contact us today.

Kids and Roth IRAs – Start Them Early on Saving for Retirement

When it comes to a Roth IRA, it turns out a person is never too young to put their earnings into this type of retirement account—even teenagers with summer jobs.

Sure, a teen or younger child won’t be thinking about the need for retirement savings—but as we adults know, the longer the time those funds can earn interest, the better. And let’s face it, that 0.1% APY on their savings account just isn’t cutting it.

With a Roth IRA, the contributions are taxed going in, grow tax free, and can be withdrawn tax free as well (when certain criteria are met). Although the Roth account owner doesn’t get a tax deduction on the contributions, most teens don’t earn enough to pay taxes on their earnings anyway. Regardless of their earning level, young workers can invest their money in a Roth IRA and get an early start on long-term savings.

Roth IRAs for minor

There is no minimum age to open a Roth IRA; the one rule that applies to anyone is that the person must have earned income. Therefore, as soon as your child is old enough to start earning money—whether as a W2 employee or as a babysitter—he or she can open an account and start making contributions. At Next Generation, we recommend you consult your trusted tax advisor regarding any self-employment income your child earns and the best recordkeeping practices in case of an audit.

Children cannot open a Roth IRA in their own name until they become legal adults at age 18 or 21, depending on the state of residence; therefore, a parent or guardian must open a Roth IRA for minors and serve as the guardian who maintains control of the account. This includes making decisions about contributions, investments, and distributions (if applicable). The guardian will also receive the account statements. However, the funds in the Roth IRA are for the benefit of the young person only. Upon reaching legal adult status, the assets are transferred to a new Roth IRA in their name.

Young savers don’t have to fork over all their earnings to build up their Roth IRA funds. Parents and other relatives can match the contributions or make a deposit equal to the entire amount your child has made up to the annual contribution limit of $6,000.

Using contributions for education

If your child plans to attend college and completes the FAFSA (Free Application for Federal Student Aid), rest assured the form does not look at the money in the child’s Roth IRA, so this will not affect his or her eligibility for financial aid. The CSS profile also excludes the IRA holdings from eligibility considerations.

However, if your child plans to tap some of the IRA contributions to defray college expenses, be aware that the distribution counts as income on subsequent FAFSAs. Therefore, the student should be careful about timing a withdrawal; the FAFSA uses financial information from two years earlier for a given academic year.

For those interested in saving for college or other education expenses, you can also open and self-direct an Education Savings Account (ESA).

Building a more robust Roth IRA through self-direction

Adults who are versed in the ways of self-directed IRAs, or the investments that can be held within them, can help their children invest in more than just stocks, bonds, and mutual funds with a self-directed Roth IRA. In today’s volatile market, some lessons on how to build a hedge against that volatility will serve them well in the future.

Guardians on the account will have many opportunities to teach their kids about the benefits and rewards of disciplined saving, and how investments work. They will also be able to share the many diverse types of alternative assets allowed in these and all other self-directed retirement plans—and develop the next generation of savvy, self-directed investors.

When it’s time for your child to take charge of their self-directed Roth and their financial affairs in general, they will see how the habit of saving money now serves them well into their adulthood. They’ll also have some firsthand experience investing in alternative assets, thanks to their parents’ investment lessons. If they remain disciplined about making retirement plan contributions and continuing to invest in alternative assets they know and understand, they will build up an impressive and diverse nest egg over the course of many decades.

Opening a self-directed Roth IRA at Next Generation

At Next Generation, we’re all about helping individuals build their retirement savings through self-direction—and that includes teens and young adults who are decades away from retirement.

If you wish to open a self-directed IRA for a minor, the Next Generation team will make sure the account is set up properly, and when your child reaches legal adult age, we will transfer account ownership and the assets into his/her name. As a full-service self-directed retirement plan administrator and custodian, we custody the assets and provide all necessary recordkeeping and tax reporting, as well as comprehensive account and transaction support.

Need more information? Contact us today.

Qualified vs. Nonqualified Roth IRA Distributions

Traditional and Roth IRAs – which can both be self-directed – help individuals to build retirement wealth. However, these retirement plans handle contributions and withdrawals differently:

The Roth IRA’s tax-free distribution status is applicable only when the distribution be considered “qualified”; otherwise, the account owner will pay tax on the amount. We break down what makes a Roth IRA distribution qualified or non-qualified here.

Qualified Roth IRA distributions

A qualified Roth distribution means that two conditions have been met:

  1. Five-year waiting period – the Roth IRA owner’s first contribution (including a Roth conversion) was at least five years ago. This waiting period begins on the first day of the taxable year in which the contribution was made.
  2. Age, disability, death, or first-time homebuyer – the Roth IRA owner is at least 59 ½ years old, has become permanently disabled, has died (and a beneficiary or the estate takes a distribution), or funds will be used to buy, build, or rebuild a first home (up to $10,000 maximum).

Both conditions must apply for the distribution to be tax and/or penalty free. However, the account owner can withdraw his or her contribution amounts any time, regardless of age, without paying taxes or penalties (this exception does not apply to earnings).

Nonqualified Roth IRA distributions

If a distribution is taken before the five-year waiting period is over or one of the qualifying reasons noted in #2 above is not met, the Roth IRA distribution is considered nonqualified. In that case, doing so may trigger a taxable event and/or withdrawal penalty.

This is also “legislated” by a set of rules called Roth IRA ordering rules. These rules govern account contributions, earnings, and distributions and determine the taxes and penalties of nonqualified distributions (they are outlined in IRS Publication 590-B and Form 8606).

The ordering rules dictate the order in which Roth IRA assets are to be distributed, which is as follows:

First: regular contributions. These are not subject to tax or a penalty tax because they were taxed going in.

Second: conversions and retirement plan rollover assets. These funds are distributed by year, with taxable assets distributed before nontaxable assets (based on the separate five-year waiting periods):

Third: earnings on contributions and conversions, aggregated.  Any earnings on a nonqualified distribution are taxed as ordinary income and may be subject to penalty tax unless an exception applies.

Exceptions to the 10% penalty

Roth IRA account owners may avoid paying the 10% penalty on what would otherwise be a nonqualified distribution if they meet one of these withdrawal reasons:

As with all things related to one’s retirement plan and personal finances, the team at Next Generation encourages account owners to consult their trusted advisors for guidance on these rules and requirements.

Self-directed Roth IRAs

An individual can open a self-directed Roth IRA to have full control over the investments within the account. Contribution limits and distribution rules are the same as with Roth IRAs that are not self-directed. At Next Generation, we are happy to answer your questions about self-directing your retirement plan, and about the many alternative assets allowed within a self-directed IRA of any type. Need more information? Contact us today.

How COVID-19 Has Affected Retirement Readiness

Workplace shutdowns and layoffs; business closures; the Great Resignation; intense stock market volatility. The COVID-19 pandemic has had a powerful effect on Americans’ ability to save adequately for a comfortable retirement and put themselves in a positive retirement readiness zone. Add to that the recent world events that are contributing to high inflation and deeper market losses and it’s no wonder people are concerned about their ability to retire with enough money.

Financial concerns began at the start of the pandemic

As far back as two years ago when the pandemic hit, many taxpayers’ financial futures were already in jeopardy.

SHRM quoted results from an April 2020 survey by Betterment, noting that 52 percent of respondents said they’d need to access their long-term savings within a year, and 43 percent said it would take six months or longer to financially recover from the pandemic. A MoneyRates survey conducted that March found that 36.4 percent of Americans within 20 years of retirement expected the COVID-19 crisis to delay their retirement (and that they planned to work longer).

In 2022, we are seeing less unemployment but higher levels of uncertainty among many Americans. Retirement plans are also affected:

Diversifying your retirement portfolio with a self-directed IRA

As we know, 2022 has been a year of market downturn and inflation, two factors that eat away at retirement assets. This compounds concern that COVID-19 hindered individuals’ ability to work, earn, and contribute to one’s retirement plan.

Self-directed investors—those with self-directed IRAs and other self-directed retirement accounts—already know that one way to hedge against inflation is through portfolio diversification. And there’s little out there that gets more diverse than a self-directed IRA that allows for a broad array of alternative assets.

Including these alternative assets—such as real estate, precious metals, cryptocurrencies, notes/ loans, and private equity—in a retirement plan allow investors to build a more diverse retirement portfolio with investments they already know and understand. Including these in one’s self-directed retirement plan avoids stock market volatility since these nontraditional investments tend to not correlate with stock market performance. Also, account owners can take advantage more nimbly of investment opportunities that arise within these asset classes.

Beating the COVID retirement outlook blues

No one can predict what will happen in the coming months with the stock market, world affairs, or the rising prices of goods on a global scale. Nor do any of us know when supply chain issues will ease, which is another factor in price increases. But at Next Generation, we know that taxpayers who are still working and can contribute to a retirement plan can do better than watch their stock portfolios drop along with the market.

Perhaps you already have an IRA and are comfortable making your own investment decisions. You may even be investing in alternative assets outside of your existing retirement plan. If so, talk to us about opening a self-directed IRA.

Need more information? Contact us today.

Inherited IRAs and Their Significances for Beneficiaries

Part 1: How the New 10-Year Rule Affects Beneficiaries of Inherited IRAs

Have you inherited an IRA from a loved one? Or do you, as an IRA account owner, have a beneficiary noted on your paperwork, who you intend to inherit your IRA?

When someone inherits an IRA, there are tax and financial implications on the inherited assets. Age, financial need, account type, and whether the deceased had already begun taking required minimum distributions are common factors to be aware of.

In these situations, the beneficiary transfers the inherited IRA funds/assets into their own newly created inherited IRA. However, because the rules can be quite complex, the beneficiary would be wise to work with a trusted advisor (a tax attorney, financial planner, or accountant) to minimize tax liability. You can read more about what to do with an inherited IRA in Part 2 below.

Enter the 10-year rule for IRA beneficiaries

A critical matter all IRA owners and beneficiaries should be aware of is the “10-year rule,” which was enacted as part of the SECURE Act. Enacted in 2020, this provision eliminated what had been referred to as the “stretch IRA,” in which all beneficiaries (spouses, children and others) could stretch the payout period over their own lifetime (life expectancy payouts).

The new 10-year rule mandates that most non-spouse beneficiaries now must now distribute the entire IRA account balance within 10 years—technically, by December 31st of the year in which the 10th anniversary of the account owner’s death takes place. Certain “eligible designated beneficiaries” are still permitted to take life expectancy payouts if they wish.

SECURE Act 2.0 proposes raising the age at which an IRA owner must start taking required minimum distributions (RMDs) again—this age was raised from 70½ to 72 in 2020 and the new provision is age 75.  The 10-year rule affects account owners and beneficiaries regarding the required beginning date (RBD) for those distributions.

Because this matter can become complicated and has tax implications based on the distributions, account owners and beneficiaries are wise to seek counsel from a trusted tax or financial advisor.

Inherited IRAs and spouse beneficiaries

The rules are different for spouses who choose to transfer the remaining inherited assets into their own IRA – one that would not need to be labeled as “inherited.” It is best to consult a tax advisor to calculate any distribution amounts that may or may not have to be taken before the survivor reaches his or her RBD for required distributions. The beneficiary may have to take a hypothetical distribution before transferring the remaining balance into their own IRA.

What’s next?

The new RMD starting age of 75 is not yet legislation (it was supposed to become effective on January 1, 2022). The IRS is taking public comments through May 25 on the proposed regulations and there will be a public hearing on June 15. That said, it could take months more before the IRS releases its final regulations. Therefore, now is a good time to review your current RMD status and how the 10-year rule may affect you, if you inherit an IRA.

Part 2: What to do with an Inherited IRA

Spouses and Traditional IRAs: Surviving spouses who inherit a Traditional IRA may transfer the assets over into their own newly created or existing IRA, or open an inherited IRA, which keeps those funds separate from other IRA assets. A surviving spouse under the RMD age must retitle the deceased spouse’s retirement plan to an inherited IRA to avoid the 10% penalty for early withdrawals. The 10-year rule does not apply to spouses.

If there is an immediate need for funds, the surviving spouse can take a lump sum distribution as well, but bear in mind this carries significant tax implications for the beneficiary.

Spouses and Roth IRAs: If the retirement plan is a Roth IRA and the survivor takes a lump sum distribution, there will not be taxes owed if the assets have been in the account for five years following the contribution. The survivor is not required to retitle the Roth IRA.

Children and/or non-spouse beneficiaries: These beneficiaries may not retitle the IRA in their own names but can transfer the funds into a new “inherited IRA.” They may cash out the IRA with a lump sum distribution (and pay taxes on the withdrawals from the Traditional IRA) if they need the money. They must adhere to the 10-year rule regardless of age, so adult children who inherit an IRA, and whose life expectancy far exceeds 10 years, will have to do some financial planning around the distributions from their inherited IRA. Whether the deceased had died before his/her RBD or had already begun taking required minimum distributions are other factors to consider.

NOTE: Previous employer 401(k) plans are subject to the same rules as IRAs when it comes to retitling. Although most individuals roll over funds from their 401(k) to an IRA upon retirement, it is important to know what types of retirement plans the deceased held.

Part 3: What to do When an IRA Beneficiary Rejects the Inherited Assets

If the IRA beneficiary does not want the assets, he or she can disclaim their entire or partial interest in the IRA. There is a limited amount of time in which to do this. Internal Revenue Code Section (IRC Sec.) 2518 allows for this disclaimer, which relieves the beneficiary of any financial benefits (and associated tax benefits) of receiving the assets.

This beneficiary disclaimer is done in writing and it is permanent, so beneficiaries must be certain of their decision. The written disclaimer must be presented to the financial institution holding the assets within nine months of the date of death, or in the case of a minor, within nine months of the date on which the beneficiary attains age 21. The beneficiary is not permitted to direct how the disclaimed assets are transferred or to whom. If these conditions are not met, the inherited IRA goes to the beneficiary (whether they want it or not).

What if There’s More Than One Beneficiary?

When a sole primary beneficiary rejects the inherited IRA, the assets are distributed to contingent beneficiaries. In the case of two primary beneficiaries, all IRA assets would then go to the other who did not disclaim. If no beneficiaries are named, the late IRA owner’s estate becomes the beneficiary unless there is a default provision in the IRA plan agreement. The issues of RMDs, regardless of the beneficiary, still stand.

NOTE: At Next Generation, we strongly recommend that all self-directed IRA owners designate at least one beneficiary to their retirement plan(s), just as they do on life insurance policies or other financial assets. If no beneficiary is designated, the account will be left to the estate.

Need more information? Contact us today.

What You Need to Know About SECURE 2.0

On March 29th, the U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022 (SSRA) by a 414-5 vote. Also known as “SECURE 2.0,” the bill includes over 50 retirement plan provisions—some of which could significantly affect taxpayers with retirement plans, and employers who offer workplace retirement plans. The U.S. Senate is expected to take up a similar bipartisan bill later this year.

Why SSRA?
By the end of the current decade, about 21% of the country’s population will be 65 or older,

according to forecasts by the U.S. Census Bureau. Most non-retired adults have some type of retirement savings, but only 36% think their savings are on track. Congress is aiming to bridge the retirement savings gap with many changes that should help.

Key SSRA/SECURE 2.0 Provisions

This legislation has extensive reach and provisions that affect employers and employees who participate in workplace retirement plans as well as those with IRAs. You can read the full list of provisions and details here, however, we highlight some of the objectives below:

Get more workers signed up. Employees would be automatically enrolled in 401(k), 403(b) and SIMPLE IRA retirement plans, however, they’d be able to opt out of coverage if they wish to do so. In addition, enrolled workers’ contribution rates will automatically increase each year by 1% until their contribution reaches 10% annually. Some exemptions and grandfathering guidelines apply.

Reduction in service period requirement for long-term, part-time workers. The current requirement is three years, however, the bill will drop the requirement down to two years. Typical current eligibility requirements allow employers to exclude workers with less than 1,000 hours of service in a year; this provision would require those with at least 500 hours of service in two consecutive years to become eligible to defer income into a 401(k) or 403(b) plan.

Delay the age for mandatory distributions. The required beginning date for taking required minimum distributions (RMDs) from retirement plans would be raised gradually from 72 (the new age implemented in the original SECURE Act) to 75.

Help locate old retirement plans. When workers switch jobs, they often leave behind old retirement plans. About $1.35 trillion are in “forgotten” 401(k) plans by more than 24 million participants, according to a recent study by Capitalize. This provision would create a national database to help reunite taxpayers with money that’s rightfully theirs. **Fun fact: did you know that money from old 401(k)’s can be rolled over into a self-directed retirement plan?

Make it easier to get an employer match. Typically, to get an employer matching contribution to your workplace retirement account, employees need to contribute via salary deferrals. Some people can’t afford to defer a portion of their salary because they’re paying off student loans. Under the new proposal, student loans repayments by the employee would count as elective salary deferrals, allowing the employer to make a match.

Increase “catch-up” amounts. The current 401(k) catch-up contribution limit would be increased from $6,500 to $10,000 for workers who are 62, 63 or 64 years old by the end of the taxable year.

More tax credits to encourage more small employers to offer plans. An enhanced retirement plan start-up tax credit of 100% for the first three years—as opposed to the current 50% of qualified start-up costs—would provide a bigger tax break for small employers (50 or fewer employees) who establish retirement plans for their workers. Another proposed credit represents a percentage of contributions small employers make to their qualified retirement plan (maximum of $1,000 per employee), for 401(k) and 403(b) plans, and SEP and SIMPLE IRAs.

Domestic abuse victims could make non-penalized withdrawals. They could withdraw the lesser of $10,000 or 50% of their account balance without being subject to the early distribution penalty tax. Participants could self-certify that they were victims of domestic abuse; the funds would need to be repaid to the plan over three years.

Extended period for discretionary amendments. Employers would now have until their business’s tax return due date, plus extensions, to adopt such amendments for the preceding year that increase benefits to participants (other than matching contributions). Individuals who wholly own an unincorporated business would have until their business’s tax return due date, without extensions, to make elective deferrals.

As with any legislation that affects one’s tax scenario, anyone with a retirement plan should read up on all the SSRA provisions. Discussing these proposed changes with your trusted advisor will help you prepare for updates that may affect your retirement savings strategy.

Need more information? Contact us today.