One of the most consequential provisions of the bipartisan retirement reform legislation “Securing a Strong Retirement Act of 2020” is the one that would raise the required minimum distribution (RMD) age for retirement account holders from 72 to 75.
The new “SECURE 2.0” retirement reform bill, as it is also known, was introduced in the House of Representatives in October by Ways and Means Committee Chairman Richard Neal, (D-MA), and Ranking Member Kevin Brady, (R-TX), intends to builds on the SECURE Act that passed at the end of 2019.
Among the 36 provisions included among the new bill’s 132 pages, the additional boost in RMD age stands out. “Increasing the age for required minimum distributions will allow Americans to keep more of their savings in retirement plans for a longer period of time,” the bill states. Section 105 of the new bill spells out the change:
“Under current law, participants are generally required to begin taking distributions from their retirement plans at age 72. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The SECURE Act generally increased the required minimum distribution age to 72. The legislation would increase the required minimum distribution age further to 75.”
Additionally, the bill includes a provision that would reduce the penalty for failing to take RMDs from a 50% tax on the amount not withdrawn to 25%, which would be further reduced if RMDs were corrected (ie: filing Form 5329 with the IRS and providing valid reasons as to why the deadline was missed) in a “timely manner.”
Another bill provision impacting RMDs would exempt retirement plan participants from taking them if their plan balance is less than $100,000 on Dec. 31 of the year before they turn 75.
Proponents tout need for relief
Hopes for this further RMD age escalation comes on the heels of the CARES Act allowing retirement account owners to skip RMD distributions this year due to the economic hardships created by COVID-19.
A recent survey conducted by the Alliance for Lifetime Income found that 70% of retirement savers are more pessimistic because of the pandemic, and 56% of them may now retire later than originally planned.
Further updating RMD rules to reflect longer lifespans and later retirements is seen by proponents, including the Insured Retirement Institute, as an important weapon in combating the challenges posed by Americans living and working longer than ever before.
“Unfortunately, this has resulted in workers facing an increased risk of outliving their retirement assets due,” IRI said in an Oct. 27, 2020 “Letter of Support” for the bill sent to Neal and Brady, citing statistics that a married couple age 65 has a 73% chance of at least one spouse living to age 90, and a 66% chance of at least one spouse living to 92.
“IRI has long supported a further increase to at least age 75. By increasing the RMD age to 75, adjusting mortality tables to reflect longer life expectancies, and modifying and exempting certain annuity benefits and payments from the minimum income threshold test, the ‘Securing a Strong Retirement Act of 2020’ would provide workers with more time and opportunities to continue to accumulate and grow their savings, thereby improving their retirement security,” IRI President and CEO Wayne Chopus said in the letter.
Raising the RMD age to 75 has also been a priority of Senator Rob Portman (R-OH), another Congressional retirement reform leader, who praised Neal and Brady for introducing the bill to help more Americans achieve a secure retirement. Twenty different provisions from Portman’s Retirement Security & Savings Act (S. 1431) are in the SECURE 2.0 bill, including raising the RMD age to 75.
One thing that is not yet clear is how SECURE 2.0 would be “paid for”—or how additional revenues would be generated to offset tax revenues decreased by the bill’s provisions. While the elimination of the “stretch IRA” is expected to pay for virtually everything else in the original SECURE Act by bringing in an estimated $15.7 billion over 10 years, no such “pay-for” has emerged in SECURE 2.0.
Stay tuned to 401k Specialist as we will continue to roll out deeper dives into key provisions in the Securing a Strong Retirement Act of 2020, as well as tracking the bill’s progress through Congress.
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