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Retirees May Soon Have More Options as House Passes “Securing a Strong Retirement Act”

Raising the required minimum distribution age to 75 (from 72) on retirement accounts will have more impact than many may realize. The House advanced legislation on Tuesday (March 29) raising the age where retirees must take RMDs or face severe IRS penalties. The measure seems to take into account much that is facing retirees, but there are some pitfalls older Americans must be watch as well.

Background

The House of Representatives passed the Securing a Strong Retirement Act, often referred to as the Secure Act 2.0, by a vote of 414-5. The most consequential provisions are below:

Raise the age savers must take minimum distributions, or RMDs, from their retirement savings accounts to 73 from 72, effective next Jan. 1, to 74 starting in 2030 and to 75 starting in 2033. *The RMD age was raised to 72 from 70½ by the Secure Act of 2019.
Increase the limits on “catch-up contributions for employees ages 62 to 64. In 2021, this age worker was permitted to contribute up to $6,500 to their retirement savings plans beyond the standard limits. The bill would increase the limit to $10,000, beginning in 2024, and indexes it to inflation.
Expanded 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,” the employer-based plan doesn’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.
Reduces the penalty for failure to take RMDs to 25% from 50%. In addition, if this failure is corrected in a timely manner, as defined by the bill, the penalty would be further reduced to 10%.
Allows employers to match a worker’s student loan payment by making the same size contribution to that worker’s retirement savings plan. This provision, which will take effect Jan. 1, is to help workers who find it difficult to save for retirement because of student-loan payments. Npt contributing causes them to miss out on their employers’ matching contributions to company-sponsored retirement savings plans.
Enhances the Saver’s Credit, which intends to incentivize low- and middle-income Americans to save for retirement with a tax credit of up to $1,000 each year. Today 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 income level.
Creates 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.

People are living longer than ever before, and everyone’s situation is different. Raising the minimum age for a person to take distributions allows more freedom to design around one’s own retirement and tax circumstances.

The purpose of the requiring distributions is that the IRS did not collect taxes on the qualified retirement money when it was earned. RMDs are their way to finally collect. Should savers opt to wait longer, it is likely the IRS will benefit as the savings is likely to grow and the expected time remaining until death is likely to shrink. Therefore, the RMDs will be much larger and taxes would be higher. This could benefit the tax rolls but still benefits the retiree.

Paul Hoffman

Managing Editor, Channelchek

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