As you may already know, the House of Representatives recently passed the SECURE Act 2.0. And, the RMD changes will be good news for late retirees.
The SECURE Act passed in 2019 (Securing a Strong Retirement Act) is expanded under the “2.0” bill, which I’ve talked about before (see https://indfin.com/a-secure-act-defense-strategy/ and https://indfin.com/secure-act-game-changer/), in a number of areas. Of particular interest to late and wealthy retirees will be the required minimum distribution (RMD) hikes. How?
SECURE Act 2.0 raises the RMD beginning dates. Tax-advantaged retirement accounts (think 401(k)s, traditional IRAs and the like, come with a rule called required minimum distributions – the amount of money that must be withdrawn from the account each year – and that rule also tells the account owner when distributions MUST begin.
The first SECURE Act raised the age from 70-1/2 to 72. The newest version will raise the age from 72 to 75. Note: Roth IRAs do not have required beginning dates because there is no RMD requirement. Taxes on that money was paid before money entered the account, so that money grows tax-free.
For workers who choose to retire later or those retirees who choose to delay withdrawals, the increased RMD could – repeat, COULD – be a significant advantage.
Some critics have even argued that this increase in the age limit advantages the wealthy because they can afford to wait. They also argue that this would cost the government significantly because of all those uncollected taxes.
My own opinion is just the opposite. The only thing really being secured is the government’s future revenue stream. Retirees may be on the wrong side of a shell game.
- The government is faced with a huge debt – no news there.
- Faced with this debt, the government needs to raise revenue.
- Debt incurred during periods of low inflation is more easily paid back with cheaper dollars during periods of high inflation.
- A combination of higher taxes and inflation virtually compounds the government’s ability to raise money.
- By delaying RMDs three more years, the annual payouts will be increased, and, my guess…
- Tax rates will be higher. Even without new legislation, the current tax law sunsets in 2025, meaning tax rates go back to the Obama-era tax laws.
- Higher tax rates combined with higher payouts just may force many into higher tax brackets.
Is it any wonder why Roth conversions are becoming so popular?
The Senate is expected to pass a comparable version. When that happens, the two bills will go to reconciliation before being returned to the respective houses for final passage.