Congress is working on some major revisions to the 2019 law that overhauled retirement tax rules for older Americans – and the changes could mean big savings for your investment portfolio and nest egg.
The House of Representatives passed its new retirement security bill in a 414-5 vote Tuesday.
"The bill provides commonsense, bipartisan solutions which address the obstacles that continue to inhibit saving for and producing income during retirement," Wayne Chopus, president and CEO of the Insured Retirement Institute, said in a statement.
The first SECURE Act, also known as the Setting Every Community Up for Retirement Enhancement Act of 2019, included major provisions designed to increase access to tax-advantaged accounts and prevent retirees from outliving their assets.
Bigger Changes for RMDs
Under SECURE 1.0, the age for required minimum distributions, known as RMDs, increased from 70½ to 72. The new legislation, SECURE 2.0, would increase the age for RMDs to 73 in 2023, 74 in 2030 and 75 in 2033.
(RMDs? Once you reach a certain age, the IRS wants you to start withdrawing from your retirement account and pay taxes, whether you need the money or not.)
That’s just one of the changes being considered. Should SECURE 2.0 be signed into law, Americans’ retirement accounts – and their retirement planning – could be changed substantially, said Lisa Featherngill, the national director of wealth planning at Comerica Bank, in an interview with Bob Powell on TheStreet’s Retirement Daily.
According to Featherngill, increasing the age at which RMDs begin would likely increase the amount of RMDs one might take but it would also increase the number of years in which a retirement account holder would enjoy tax-deferred growth.
“The RMD is based on the value of the account and life expectancy,” she said. “So, assuming there's no change in the life expectancy tables, the distribution would be higher if you wait to 75 versus if you took it at 72. But you have additional years of deferred tax.”
Catch-up Contributions and Inflation
Another provision would Increase catch-up contributions to employer retirement plans for individuals ages 62, 63 and 64 from $6,500 to $10,000. And what’s notable about this provision is the catch-up contribution index for inflation, she said. So, it might be $10,000 in 2023 but for someone who is now age 50 it could be quite higher, say $14,250 if inflation runs at 3%, by the time that person turns 62.
Powerful Help for Younger Workers
Another provision would provide an option for employer matching contributions to be made into the Roth portion of the retirement plans. Typically, the employer’s contribution goes into the employee’s pre-tax 401(k) account. So, for someone who is young and in a low tax bracket today but expects to be in a higher tax bracket in the future, this option could be “incredibly powerful,” said Featherngill.
“If you could afford to pay the tax on the employer match in the Roth today, then that money builds up tax-free for the rest of your life,” she said.
Employer Contributions, Charitable Contributions
SECURE 2.0 would also allow an employer contribution to an employee retirement plan based on the employee’s student loan payments. “If you've got an employee who's paying back student loans, the student loan payments can qualify as contributions to the retirement plan only for purposes of the employer match,” she said. “That could be really significant to help (workers) save for retirement while at the same time taking care of debt from college.”
SECURE 2.0 would also allow individuals age 70½ and older to make a one-time charitable distribution, up to $50,000, from an IRA to a split-interest trust such as a charitable remainder trust. “Most of my clients love qualified charitable distributions or QCDs,” she said.
Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.
The caveat, however, has always been that it has to be a public charity, said Featherngill. “It can't be your remainder trust or anything else where you have an interest,” she said. But SECURE 2.0 would allow an account owner to give up to $50,000 into a split interest trust, a charitable remainder trust. A charitable remainder trust allows a grantor to create a trust that generates revenue for a few years and then transfers the assets to a charity, according to the Legal Information Institute.
The proposed bill, HR 2954, would also allow domestic abuse survivors to take a distribution of the lesser of $10,000 or 50% of the plan balance without penalty for one year following the abuse. “This gives access to additional funds if somebody needs it,” she said.
Of note, there's a version of SECURE 2.0, the Retirement Security and Savings Act, in the Senate. That proposed legislation features many provisions included in the House's Securing a Strong Retirement Act but there are differences as well.
“It will be interesting to see if (the House and Senate) combine these bills,” said Featherngill.
And, of course, any proposed legislation must be signed into law by the President, she noted.
And until then, retirees and would-be retirees should keep an eye on Congress. “Let's see what happens and then we can plan for next year,” she said.