Before You Know It No Mo RMDs

Financial Planning Tax Strategies
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RMD Age Stands to Rise to 75 as House Passes Secure Act 2.0. Here’s What to Know.
By Nick Fortuna
March 29, 2022 6:51 pm ET
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The second major piece of retirement legislation in little more than two years advanced in the House on Tuesday, putting required minimum distributions in line to rise to age 75 over the next decade and increasing the limits on catch-up contributions to retirement accounts for older Americans.

The House of Representatives passed the Securing a Strong Retirement Act, sometimes called the Secure Act 2.0, by a vote of 414-5. Key provisions also include expanding automatic enrollment of workers in qualified retirement plans like 401(k)s and indexing catch-up contribution limits for individual retirement accounts to inflation.

“These changes will make it easier for American families to prepare for a financially secure retirement,” Rep. Richard Neal (D., Mass) said on the House floor. “This is transformative legislation.” Neal introduced the bill with Rep. Kevin Brady (R., Texas).

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Earlier Tuesday, the Senate Committee on Health, Education, Labor, and Pensions held a hearing on retirement security. Committee Chairwoman Sen. Patty Murray (D., Wash.) said she and ranking member Richard Burr (R., N.C.) “are now working to pull together bipartisan ideas in this space and move a retirement legislative package later this spring.” Last May, Sens. Rob Portman (R., Ohio) and Ben Cardin (D., Md.) introduced legislation similar to the Secure Act 2.0 called the Retirement Security and Savings Act, but that bill hasn’t advanced through the Senate Finance Committee.

Key provisions of the House bill passed Tuesday include:

? Raising the age at which seniors must take required minimum distributions, or RMDs, from their retirement savings accounts to 73 from 72, effective next Jan. 1. The bill will raise the age to 74 starting in 2030 and to 75 starting in 2033.

“For high-income individuals, the required-minimum-distribution age being pushed out further is going to be very attractive,” said Lisa Featherngill, national director of wealth planning at Comerica Bank.

The RMD age was raised to 72 from 70½ by the Secure Act of 2019.

? Increasing the limits on so-called catch-up contributions for employees ages 62 to 64. In 2021, these workers were allowed to contribute up to $6,500 to their retirement savings plans beyond the otherwise applicable limits. This bill increases that limit to $10,000, beginning in 2024, and indexes it to inflation.

? Indexing the catch-up contribution limit for IRAs to inflation, beginning in 2024. Currently, savers ages 50 and up may contribute an additional $1,000 annually to their IRAs, but that limit isn’t indexed to inflation.

? Expanding automatic enrollment of workers in employer-sponsored retirement saving plans. Beginning in 2024, employees would be automatically enrolled in plans such as 401(k)s and 403(b)s unless they opt out. Workers’ initial automatic contributions would be between 3% and 10% of pretax earnings, and that amount would be increased by 1% each year until reaching 10%.

All current 401(k) and 403(b) plans are “grandfathered,” meaning they don’t have to comply with this provision. There’s also an exception for businesses with 10 or fewer employees, businesses that have existed for less than three years, church plans, and governmental plans.

? Allowing employers to match a worker’s student loan payment by making an equivalent contribution to that worker’s retirement savings plan. This provision, which will take effect Jan. 1, is intended to help workers who can’t afford to save for retirement because of high student-loan debt, which causes them to miss out on their employers’ matching contributions to retirement savings plans.

? Creating an online, searchable “retirement savings lost-and-found database” at the Labor Department to help workers and retirees find their lost retirement accounts, including those from previous employers.

? Enhancing the Saver’s Credit, which incentivizes low- and middle-income Americans to save for retirement with a tax credit of up to $1,000 annually. Currently, these workers can qualify for a tax credit of 50%, 20%, or 10% of their contributions to a qualified retirement plan, up to $2,000, based on their income level.

This bill does away with that tiered credit percentage by creating a single credit rate of 50%, beginning in 2027. It also directs the Treasury Department to increase public awareness and use of the Saver’s Credit.

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? Raising the age at which seniors must take required minimum distributions, or RMDs, from their retirement savings accounts to 73 from 72, effective next Jan. 1. The bill will raise the age to 74 starting in 2030 and to 75 starting in 2033.

“For high-income individuals, the required-minimum-distribution age being pushed out further is going to be very attractive,” said Lisa Featherngill, national director of wealth planning at Comerica Bank.

I’m not sure that she’s thought that all the way through when saying that delaying RMDs will be attractive to those with high incomes. While delaying taxes on withdrawals may seem attractive at first, it will just make those distributions and the taxes owed on the distributions even larger when they do happen, because the account balance hasn’t been decreased by the earlier withdrawals. These larger withdrawals could potentially push someone into a higher bracket, exacerbating the increase in taxes owed. Additionally, for non-spousal heirs of the account, it will also make the tax bite worse, because the accounts will still need to be completely distributed within 10 years, but the account will, again, be larger than if withdrawals had been taken.

When the delay of paying taxes results in a paying larger tax bill, it’s not necessarily such a good idea to delay.

I will say, for those who are charitably-minded, the delay in RMDs will allow additional years where QCDs can be done before having to take RMDs, so that could help offset the higher tax bill that delaying distributions precipitates. Additionally, SECURE Act 2.0 indexes QCDs to inflation, so the giver will no longer be limited to the current $100k.

As always, YMMV, so you need to run the numbers for your particular situation.

? Increasing the limits on so-called catch-up contributions for employees ages 62 to 64. In 2021, these workers were allowed to contribute up to $6,500 to their retirement savings plans beyond the otherwise applicable limits. This bill increases that limit to $10,000, beginning in 2024, and indexes it to inflation.

The article neglected to mention the fact that beginning in 2023, catch-up contributions will be required to be Roth contributions, which means that the income used to make those contributions will be taxable.

AJ

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I’m not sure that she’s thought that all the way through when saying that delaying RMDs will be attractive to those with high incomes.

If you are in the top bracket and your heirs are not, delaying the withdrawals until your heirs can take them does save taxes.

–Peter

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If you are in the top bracket and your heirs are not, delaying the withdrawals until your heirs can take them does save taxes.

As I said As always, YMMV, so you need to run the numbers for your particular situation. That said, I would point out that heirs of people in the highest tax bracket probably have a greater likelihood to be in the highest bracket themselves, especially after inheriting the assets that were producing the income that put the decedent into the highest tax bracket.

AJ

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What are the “gotchyas” in this bill? Does it end the backdoor Roth IRA, for instance?

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I’m not sure that she’s thought that all the way through when saying that delaying RMDs will be attractive to those with high incomes. While delaying taxes on withdrawals may seem attractive at first, it will just make those distributions and the taxes owed on the distributions even larger when they do happen, because the account balance hasn’t been decreased by the earlier withdrawals.

We were just discussing this last night. I rather like the idea of RMDs ending, because it allows me more time to pull funds out in a tax advantaged way, at our pace, or make QCDs as a family decision if the funds are too high. While RMDs are still a ways off for us, we are now at the point where capital gains are the largest part of our income, and I am just beginning to understand the golden goose of capital gains taxation. It’s impressive how much cash can be made available at zero taxation for a couple filing jointly. I don’t want RMDs to mess that up by providing large amounts of ordinary income.

While this could make inheriting funds more tax heavy, we have been able to convert a decent amount to Roth accounts for the kids to inherit. Better yet, they have understood the lesson of investing for retirement and are doing it. Since they now have to liquidate inherited IRAs after 10 years, we have decided that the best way to transfer money to them for their inheritance is to continue to fund their Roths in full while we are alive, allowing them to fund their Roth 401Ks and save to buy a house or develop their taxable brokerage accounts. Between our funding their Roths since the age of 14 and their having learned the importance of retirement investing, supplemented by inheriting our Roths and taxable accounts, we feel no need to have them inherit the Traditional IRAs as well. They have been taught how to fish.

FWIW,

IP
having pounded the table about retirement investing early and often

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That said, I would point out that heirs of people in the highest tax bracket probably have a greater likelihood to be in the highest bracket themselves, especially after inheriting the assets that were producing the income that put the decedent into the highest tax bracket.

Not all assets that produce income can be inherited. Some have pensions and/or annuities plus social security or were still working at the time of death which were enough to put them in a higher tax bracket.

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What are the “gotchyas” in this bill? Does it end the backdoor Roth IRA, for instance?

The revenue that they expect to add from it is mostly due to increases in contributions to Roth accounts, so those contributions will be taxed, rather than tax-deferred:

  1. Requiring catch-up contributions to 401(k)s, 403(b)s and 457(b)s be Roth, rather than tax deferred (Note - this will probably prompt the plans that don’t already have a Roth option to add one - either that, or they would have to no longer allow catch-up contributions, which would likely be seen as a takeaway by the employer)
  2. Allowing SEP IRAs and SIMPLE IRAs to be designated as Roth IRAs (Note - unlike the other plans, they did not require that catch-up contributions to SEPs and SIMPLE IRAs be Roth)
  3. Allowing employer contributions/matches to be designated as Roth

Another thing that may be considered a ‘gotcha’ by some is that the bill would require automatic enrollment in retirement plans, rather than the current rules which allow automatic enrollment. (Note - the employee would still have the ability to opt out.)

Additionally, it makes it easier for qualified plans to provide annuities as a distribution method, which can add ‘skim’ if that’s the distribution option the employee chooses.

I did not see the end to the backdoor Roth process as a provision in this bill, but since this bill has only been passed by the House, there’s still a possibility that it will get added. And there will likely be other changes, too, if it gets passed by the Senate - which still needs to occur. Since there have been similar bills [Encouraging Americans to Save Act (S. 2452), Retirement Security and Savings Act (S. 1770), and Improving Access to Retirement Savings Act (S. 1703)] introduced but not acted upon, it’s not clear that the Senate will do so.

AJ

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I did not see the end to the backdoor Roth process as a provision in this bill, but since this bill has only been passed by the House, there’s still a possibility that it will get added. And there will likely be other changes, too, if it gets passed by the Senate - which still needs to occur. Since there have been similar bills [Encouraging Americans to Save Act (S. 2452), Retirement Security and Savings Act (S. 1770), and Improving Access to Retirement Savings Act (S. 1703)] introduced but not acted upon, it’s not clear that the Senate will do so.

Since the House vote was 414-5, do you expect a large number of changes by the Senate?

PSU

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Since the House vote was 414-5, do you expect a large number of changes by the Senate?

I’m sure that there will be Senators who want to put their own stamp on it, so there will probably be some. Here’s a comparison that was done last year that may give some hints as to what changes could be https://www.groom.com/wp-content/uploads/2021/07/Comparison-…

What I’m more skeptical about is whether the Senate will actually pass any legislation.

AJ

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Since the House vote was 414-5, do you expect a large number of changes by the Senate?

News article I saw said the senate had their own version of the bill in progress already.
So there’s probably going to be a number of differences. The two bills will be “reconciled” to a new one that will have to pass both house and senate.

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News article I saw said the senate had their own version of the bill in progress already.

There are actually at least 3:

  • Encouraging Americans to Save Act (S. 2452)
  • Retirement Security and Savings Act (S. 1770)
  • Improving Access to Retirement Savings Act (S. 1703)

and I’ve seen some articles referencing other bills, too, but didn’t grab the details.

The Retirement Security and Savings Act, co-sponsored by Cardin (D-MD) and Portman (R-OH) (so also bipartisan) seems to be the leading contender, but it’s been stuck in committee since it was introduced in May, 2021.

So there’s probably going to be a number of differences. The two bills will be “reconciled” to a new one that will have to pass both house and senate.

Maybe, or the Senate could choose to vote on the House bill as-is.

I’m still skeptical of whether the Senate will actually vote on anything.

AJ

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