Proposed Act Further Extends RMD Age
/Proposed Act Further Extends RMD Age
A bipartisan follow up to the Secure Act, the largest retirement saving legislation update since 2006 which was signed into law in December of 2019, passed in the US House of Representatives on March 29th. Dubbed the Secure Act 2.0, this new legislation builds off many of the changes brought by its predecessor in an effort to improve retirement savings rates.
One of the most pertinent components of the proposed bill is a further delay in the Required Beginning Date for Required Minimum Distributions (RMD). As a reminder, owners of most types of retirement accounts, Roth IRAs being the most notable exception, are required by law to begin taking money out at certain ages. The reason for this is to generate tax revenue (remember that distributions from pre-tax retirement accounts are taxed as ordinary income) and to prevent wealthy savers and their heirs with large balances from continuing to benefit from the tax preference that retirement accounts provide.
Prior to 2020, RMDs were required to start in the year the retirement account owner reached age 70.5. The original Secure Act updated that starting age to 72 for anyone that wasn’t already taking RMDs before 2020. The proposed legislation within the Secure Act 2.0 would further extend that beginning age to 73 starting on January 1, 2022, 74 starting on January 1, 2029 and 75 starting on January 1, 2032. Of course, these later start dates would only apply to those that are not already subject to RMDs. Everyone else would continue under the rules in effect at the time. The effect of these extensions is that retirement dollars stay in the accounts longer, delaying taxes and allowing more time for potential growth.
Other important highlights of the proposal include:
Increased Catch-up contribution rates for 401(k)s for those aged 62 - 64. Rather than the current $6,500 for 401(k)s that applies once you’ve reached age 50, people would be able to contribute up to $10,000 worth of catch-up contributions. This is on top of standard contribution limits.
Increased Catch-up contribution rates for SIMPLE IRAs for those aged 62 - 64. Rather than the current $3,000 that applies once you’ve reached age 50, people would be able to contribute up to $5,000. This is on top of standard contribution limits.
Require that as of January 1, 2022, all catch-up contributions to qualified retirement plans would be made as Roth, after tax, contributions. This is a significant change!
Employees can elect to have employer matching contributions made to the Roth portion of their retirement plan. Currently all employer contributions are required to go into the pre-tax portion.
Creates a Roth option for SEP and SIMPLE IRAs.
Employers would be allowed to include the amount employees pay towards student loans in their matching calculations if that employee isn’t contributing enough to the 401(k) to maximize the match. In other words, employers will be able to match student loan payments with retirement contributions, allowing those with large debt burdens to also begin building towards retirement.
Increases to incentives and tax credits to help employers set up plans, and even allows for an offset tax credit to help cover up to $1,000 of employer contributions per employee for small businesses.
New retirement plans will be required to include automatic enrollment, where employees have to opt out of saving for retirement rather than opting in.
The bill will now move to the Senate for debate and amendment. Given its bipartisan support and that there are several similar bills already circulating in the Senate that include many of these proposed changes, support seems strong. We will continue monitoring its progress and bring you updates as to the impact on qualified plans as they arise.
