How RMDs Could Change With New Bill

A new law may soon allow retirees to keep their money untouched a bit longer.

The Securing a Strong Retirement Act, a bill originally pushed in 2021 but which may finally pass this year, would push the starting point for required minimum distributions (RMDs) from age 72 to 74 and 75. That means retirees could stave off being required to tap into their tax-deferred retirement accounts like 401(k)s and preserve their nest eggs for more years.

This is on top of the news from earlier this month that the IRS is adjusting its actuarial tables on RMDs for the first time in 20 years. In response to longer projected life spans, that means retirees can take out less money at 72, under the current RMD starting age. The recent lowering of RMDs and the proposed delay of the RMD starting age are part of a trend to account for longer retirement periods and help retirees preserve their coffers throughout their golden years. These dynamics further enhance shifts that arrived with the 2019 SECURE Act, which pushed the RMD starting age from 70.5 to 72.

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How RMDs Could Change With New Bill

Required minimum distribution requirements are designed to make sure retirees don’t hold money in tax-deferred retirement accounts — such as 401(k) plans and individual retirement accounts (IRAs) — for too long. There is an RMD table that gives a life expectancy factor for each year telling how much of the money in an account a retiree is required to withdraw for that year. The equation is simple — simply divide the total money in your account by the life expectancy factor and you have your required withdrawal for the year. For example, in the current table, the life expectancy factor for age 74 is 25.5. If you have $100,000 in your account the year you turn 75, simply divide $100,000 by 25.5 and you’ll see your required withdrawal for that year is approximately $3,921.

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Previously, you were required to start taking withdrawals from your IRA or employer-sponsored retirement plan when you reached age 70.5. But the 2019 SECURE Act made a critical change to when RMDs begin. If you reached age 70.5 in 2019, the prior rule applied and you had to take your first RMD by April 1, 2020. Yet if you reached age 70.5 in 2020 or later you must now take your first RMD by April 1 of the year after you reach 72.

If the new Securing a Strong Retirement Act — commonly known as the SECURE Act 2.0 — is passed, the age when RMDs begin would further shift to 74 in 2029 and 75 in 2032.

With people living and working longer, pushing back when they have to start taking money from their retirement accounts allows them to build more wealth and save longer.

Other Changes This Bill Could Provide

This isn’t the only change that the SECURE Act 2.0 could bring for retirees. Other possible actions include:

• Mandating automatic enrollment in 401(k) plans. Currently, many employers offer a 401(k) plan but do not automatically enroll their employees in it, making them opt in. This change would make it so employers were required to have automatic enrollment and force employees who don’t want to participate to opt out. There would also automatically increase the amount an employee contributes annually up to 10%.

• Increase catch up contribution limits from $6,500 for 401(k) plans and $1,000 for IRAs to $10,000 for workers between ages 62 and 64. Savers over a certain age are able to contribute more than the limit to their retirement plans. This would increase that overage.

• Link the catch-up contribution limit to inflation so it increases over time.

• Allow employers to provide a 401(k) match for student loan payments. This would be an additional perk companies could offer young workers and would allow them to save more money while still paying off their loans.

• Reduce the RMD penalty. Currently, someone who fails to take out their RMD is penalized 50% of what they should have withdrawn. The bill would reduce that to 25% or 10% if fixed quickly.

The Bottom Line

The age at which retirees are required to start withdrawing from their retirement accounts was recently raised to 72. A new bill that may pass this year would raise it even more, eventually ending up at 75. The bill would take several other actions as well, all designed to make it easier for workers to save for retirement.

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