Retirement Update: A New Bill Could Decrease This Common Penalty
The “Securing A Strong Retirement Act of 2021” (also known as the Secure Act 2.0), an economy-focused piece of legislation which was stalled last year, is now being reintroduced and given new feet per Barron’s.
The legislation would ensure that workers are to be automatically enrolled in employee-sponsored savings plans — and delay the age when retirees must begin taking distributions from them. Also called RMD, or required minimum distributions, these provisions came with heavy penalties in the past if retirees did not start drawing on the assets by a certain age.
Right now, retirees who do not begin drawing on funds from their 401(k)s or IRAs on schedule, or by the RMD date, are subject to a penalty equaling 50% of the amount they should have withdrawn. This equates to paying tax on money you potentially have already paid taxes on (in post-tax accounts like Roths) or needing to pay double tax on money you have not yet paid taxes on (like pre-tax 401(k)s or traditional IRAs).
The new bill would reduce these penalties significantly. The Securing A Strong Retirement Act would reduce this penalty down to 25% from 50%. Additionally, the bill would give retirees some leeway — and if an honest error is corrected promptly, the penalty is reduced even further to 10%.
Further, the bill would raise the age at which seniors would be required to start taking RMDs from 72 to 73. The bill would raise the age even further, to age 74, starting in 2029 — and to 75 starting in 2032.
What Impact Will the Secure Act 2.0 Have if Enacted?
The proposed changes are a game changer should the legislation pass. Younger generations are becoming increasingly involved in investing, and raising the RMD age would likely influence workers to invest their own money outside of employer-sponsored accounts. These accounts — 401(k)s, traditional and Roth IRAs — all have tax-advantaged benefits that are not enjoyed by other investment instruments.
The major caveat with said accounts, however, is that there are contribution limits attached to each of them as a trade-off for tax benefits. Investors often circumvent this by investing in their own brokerage accounts, businesses and real estate. As a result, seniors might not have such a need to draw down on their retirement accounts immediately.
Another consideration related to these investment accounts aimed at seniors is any potential tax hit. Only a Roth IRA allows tax-free distributions; if you are invested in another sort of account, you will have to consider the tax consequences of drawing on your money. To a senior who has enjoyed watching their retirement account grow during the bull market over the past two years, the thought of taking money out — and then paying taxes — might not sit well.
Increasing the RMD age changes the need for this, and if passed, the bill could allow seniors who are able to invest their money in a long-term vehicle to see larger potential returns.
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