There is a new bill moving through Congress right now that has bipartisan support and is fairly likely to pass in its current form.
We can get a good sense of what the bill is intended to do by looking at the title page. The stated goal of the bill is to increase retirement savings, and to simplify and clarify retirement plan rules.
Change #1 is that the bill enacts changes to required minimum distributions and does so according to a schedule that depends on how old you are now. This change will affect roughly 20% of IRA owners who don’t need their RMD’s to cover their lifestyle expenses and they will be able to push their RMD’s further into the future.
Change #2 involves catch-up provisions for IRAs, and that includes Roth IRAs. This section of the bill indexes IRA catch-up contributions for inflation, which brings them up to par with other retirement investment accounts.
Change #3 are age-sensitive changes to catch-up provisions for traditional retirement plans. This change only affects people who are currently between the ages of 62 and 64 and says that starting in 2023 your catch-up provisions for traditional plans go from $6500 to $10000. This provides a narrow window for people who are just on the threshold of retiring but need to make greater contributions.
Change #4 requires all catch-up contributions to be made to Roth accounts. Roth IRA’s are so beneficial to people, especially in a rising tax rate environment, that many people believe that at some point they will be taken away, but the truth is that the government loves the Roth IRA. It provides the short-term infusions of cash that the government and politicians desperately need today rather than decades from now.
Change #5 is that retirement plan employer contributions can be designated to Roth accounts. Is a rising tax rate environment, this is exactly what we want. With a 30-year time horizon, this will allow us to squeeze the most efficiency out of our retirement dollars. This will probably result in you having to pay taxes on the matched amount, but given the historically low tax rate environment that we are in that’s still a good deal.
Change #6 are changes to the penalties for failure to take required minimum distributions. Instead of being penalized by 50% for failing to take your RMD by the required date, the penalty is reduced to 25%. The penalty becomes 10% if you correct that within three years. This sounds like an improvement but it may also mean the IRS is less likely to waive the penalty than they were previously.
One of the biggest takeaways from these changes is that the government loves Roth IRAs. They love it because it gives them revenue immediately, during their tenure in office, and we love it because it allows us to take advantage of historically low tax rates before they go up for good.
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Jeff Levine on Twitter: @CPAPlanner