In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses some positive retirement law changes that could be coming this year via the “SECURE 2.0” Act.
Retirement Plan Changes Coming in 2022
Hey everyone, Adam Bergman here, tax attorney, founder of IRA Financial. And on today’s, Adam Talks, more retirement legislation? Really? Well, this is actually good stuff.
Much better than the Build Back Better bill and all the potential IRA legislation I’ve been talking about for the last three or four months. So, some interesting stuff, and I think five huge retirement law changes that I think you’ll be kind of happy with. I know I am.
So here going to share some good news. So just a step back. September 15, the Ways and Means Committee passes a tax proposal. In it, we all know about this, there were prohibition on IRAs investing in private placements, prohibition on IRAs investing in any entity the IRA owner owns more than 10%. There was caps of $10 million. All this other stuff, right? No conversions, Mega Backdoor Roth IRA, Mega Backdoor, 401(k) going to go bye bye. Everyone goes crazy.
And thanks to all you, we get the really bad stuff out. So Build Back Better bill passes the House, goes to the Senate and dies in the Senate, or at least is sleeping now in the Senate. The bad stuff, the really bad House stuff, never made into the Build Back Better bill, Senate version, meaning the IRA’s prohibition on private placement. That’s gone.
IRAs not being allowed to invest in entities more than 10% owned by IRA owners. Goodbye. What remained is the cap. But the cap now doesn’t kick in this year, and it’s not retroactive. It will kick in in 2028 if that ever happens.
Roth conversions, ten years, 2031 will be prohibited if you make more than a threshold of $400,000, $450. That’s adjusted for inflation. And unfortunately, the Backdoor Roth IRA and the Backdoor Roth 401(k) are still in this bill, although the bill is, as I mentioned, currently sleeping in the Senate. There’s a chance it will be resurrected. We’ll see what happens with Manchin and Sinema, but right now it’s dormant.
Related: SECURE Act 2.0 & Your Retirement
Retirement Planning & The RISE Act
What lost media attention is that a couple of months ago, the House Education and the Labor Committee, they approved something called the RISE Act, which was House Bill 5891. And this mirrored the Securing a Strong Retirement Act of 2021, which again, kind of didn’t go anywhere because of all the political turmoil we’ve been involved with COVID and then Democrats won the election. They controlled, they control the House, Senate and presidency. And that kind of got pushed aside to say, hey, let’s focus on budget reconciliation, because now we can get done everything we need to do on our own and we don’t need the Republicans. Even though the SECURE Act 2.0, which is the Securing a Strong Retirement Act of 2021, was almost unanimous, it was pretty much unanimous on both sides.
Democrats, Republican, and the RISE Act was also unanimous. Okay, it was a voice vote, but it was unanimous. Where else in Washington do you get unanimous votes? Nowhere. Right? Nothing is unanimous. Retirement account legislation is generally always unanimous. The Secure Act 1.0, which was passed December 2019, raised the RMD from 70 1/2 to 72. Had some really good stuff with 401(k)s. That was almost unanimous as well.
So, why? Because Democrats and Republicans know, and I’ve said this repeatedly, the retirement system works. Unfortunately, everyone on the Democratic side, most everyone, got really wrapped up into budget reconciliation and just went bonkers. Right? And unfortunately, the people in charge, Senate Finance Committee, Wyden and the House Ways and Means Chair, Richard Neal of Massachusetts went a little bit off and they just was like, let’s see what we can get in.
We’re going to do policy changes and we don’t need to deal with the Republicans, even though we usually get their consent on anything that’s down the middle and helps Americans from a retirement standpoint. Who cares? Let’s do what we need to do now because who knows when we’re going to get this chance again. And budget reconciliation happened, I think they got a little greedy and Manchin basically stopped it. So what’s the RISE Act? Okay. It’s good stuff.
And I’ll give you five or six really good rules that I think if passed could have a profound impact on all of us and a positive. So just so you know how all this happened, the chairman and ranking member of the House Education and Labor Committee, they introduced this bipartisan legislation, which basically, it’s called RISE, but it just mirrors the Securing a Strong Retirement Act of 2021, also known as Secure Act 2.0. This was in early November. The committee chairman was Bobby Scott, Democrat from Virginia, and Rep. Virginia Fox, Republican, from North Carolina.
Right. It’s what we like to see – bipartisanship, Democrats, Republicans working together for all of us the way the system should work. The committee’s ranking Republican was Rep. Mark DeSaulnier of California and the Chairman of the Subcommittee on Health, Employment, Labor and Pension Health Committee. And his Rep., Rick Allen, Republican of Georgia, and the subcommittee’s ranking Republican. They introduced a retirement Improvement and Savings Enhancement RISE Act. Retirement Improvement and Savings Enhancement RISE Act. That’s Bill 5891. Again, it kind of mirrors the SECURE Act 2.0. So what is it?
Changes to Retirement Plans Under the Rise Act
First thing, it makes enrolling workers in retirement accounts easier, automatic. So, under the law, employees offering 401(k)s or 403s would enroll employees automatically in those plans unless the workers opted out. The initial contribution automatically selected for employees would range between 3 and 10% of pretax earnings. And if the employer opted out for a lower automatic contribution amount to start, it would increase 1% annually. The idea is, hey, let’s get people saving.
And the easiest way to get people saving is just opt them in. You start a job, the employer is a 401(k). We’re going to automatically enroll you. If you want out, that’s fine. But you have to opt out proactively. We’re not going to make you proactively opt in; you’re going to have to proactively opt out, which I’m all in favor for.
Studies have shown that people save more when they’re automatically opted-in to programs. Okay. Especially programs for their benefit, like retirement savings. Especially when businesses are giving three, four, 5% safe harbor contributions if you put in a minimum amount of money, like a 3% of your salary. Opting in basically just takes that decision out of your head and kind of just forces you in.
So if you make 60 grand a year, 3% is about $1800 over twelve months. Not too difficult to do. A stretch for some, but definitely worth it. And the science and study show that get people in, they’re going to save more.
Changes to IRA & 401k Contribution Limits
Second, another good one. They’re going to raise the catch-up contribution limit. So employees over the age of 50 are allowed to make catch-up contributions. $1,000, right? $6-7,000. Okay. It’s $6,500 in 401(k)s.
Solo 401(k) is $20,500, if you’re over 50 it’s $27,000. That’s if you have a 401(k) or Solo K. The Act would increase the amount of catch-up contributions to $10,000 for workers between the age of 62 and 64. And it would index the amount to inflation. Okay. So it’s a smaller amount of years.
I don’t know why they did the 62 and 64. Not like 60 and 70 or 60 and 72, but they’ll work that out. But at least they’re giving people older a bigger amount of money and incentives to put more in their retirement account to catch up for some of the past years when maybe they didn’t have the income. The idea is that generally you’re in your 50s, 60s, you’re going to potentially be in your highest income-earning years.
So why not put the most amount of money away and not be capped at that $6,500 or the $1,000 an IRA. But let’s expand that up. Again, I’m all in favor of this. The more money, maximum amount you let people put away better for all of us. You don’t have to, but at least it’s there.
And the catch-up limit is not currently indexed for inflation, right? IRAs – we saw ’21-’22, $6,000 to $7,000. How’s that possible? It didn’t even go up $1,000.
We have 7% inflation. Why? Because it has to go up by $1,000 and they won’t let it go up by $500. Crazy, right? We’re going to raise rates.
We have literally 7% inflation. They raise the 401(k) contribution from $19,500 to $20,500, $26,000 to $27,000 if you’re over 50. They didn’t touch IRAs, which I’ve talked about, which is ridiculous. But, at least this is a good provision. $10,000 when you’re over the age of 62 or so.
Employer Matching Student Loan Payments
Student loans. Under the Act, when employees make a student loan payment, employers would be allowed to match up to making the equivalent contribution to their retirement account. So let’s say you got $500 student loan payment a year. This provision will allow the employer to match that. I would think the employer will get a tax deduction for that, but it will be part of your retirement account, part of your retirement account planning, and the employer will get the ability to make that match, which will help you because you’re going to be able to pay the student loans off quicker. And it’s a nice savings strategy.
Now, I know some employers have got private letter rulings on this, but this will open up to all of us so that we could offer more incentives to our employees in a tax-advantaged way. So, without it being treated as income to the recipient and the employer will get the deduction. It’s another way of working with your employees and providing them more benefits in a tax-efficient way. So another winner, I think.
Changes to the Required Minimum Distribution Age
Change the RMD age again. Hey, we went from 70 1/2 to 72. Now they want to go potentially up to 75 in 2032. So they’re going to raise the age gradually. They’re going to go from 72 to 73 and then beginning in 2029, 74, and then in ’32, 75. So over the next 10,11 years. Ultimately, it will get to 75, which is great. We’re all living longer. Hopefully, we’re going to be done with COVID soon and we’re all going to be in good shape. We’re going to eat well and we’re going to be healthy and we’re not going to have to wear masks anymore and we’re going to live long. So why not increase the RMD age? So again, good provision. This is why it was bipartisan support. Retirement legislation should not have been rammed down our throats during budget reconciliation.
I’m not going to focus all my harsh words on the Democrats. It happens. Republicans have done stupid stuff through budget reconciliation. People get worked up and it gets out of hand because it’s a free for all. And you expect some of this stuff is going to get knocked out.
Although in this case, the retirement stuff should never be part of this, it should have been part of this. All the retirement legislation that’s in the Build Back Better bill – the caps, the accredited investor, the mega backdoor, all that stuff, which never would have passed bipartisan support, should have been negotiated, should have been subject to discussion, committee review, like it was in RISE, like it was in the SECURE Act 1.0, in the Strong Retirement Act 2.0. But the Democrats, I think, made a mistake. And I don’t blame all the Democrats. I don’t. I blame Widen and Neal with the chair of the Finance Committee, the chair of the House Ways & Means Committee.
They knew what they were doing, especially Senator Wyden. He’s had an issue with Roths the whole way through. I don’t think Neal did, but I think somehow Wyden and his staffers were able to convince Neal on the Ways and Means Committee that this was an important policy initiative. Obviously, we all remember the Peter Thiel stuff in ProPublica. Didn’t help. Did not help us at all and just got caught up into the progressive tsunami. And that’s probably to their detriment, because I don’t think if they were as aggressive, not just on retirement stuff, but we saw on some of the child tax stuff and the spending, I think Manchin would have gone along. But I think they pushed it a little too far and now they’re going to have to come back to Manchin and Sinema of Arizona, and negotiate, which is the way it should be. I’m not a big fan of budget reconciliation. It’s not a Democratic thing. The Republicans abused it too. It’s not a good thing.
And again, Filibuster, no matter what side you are like, the Senate needs to have a place. The House needs to have its place. There are rules about certain legislation having a certain requirement of votes, throwing it all in reconciliation and circumventing that. Just doesn’t work for me. And again, it’s not Democrat or Republican.
Both sides have abused it. I just don’t think it’s a good idea. And then one of the further provisions I also like, these are like the five biggies. I’ll go through some other winners, but these were the five biggies where they were going to reduce the penalties if you screwed up on the RMD. So right now if you screw up, it’s 50% penalty and they would have reduced it to 25 or 10% if they correct it, if you corrected it in a timely fashion, which is smart. People, they make mistakes, right? You’re in your 70s or 80s, you have health issues. You’re not worried about RMDs, at least not all of us. And you missed a deadline. 50% is crazy.
So I’m glad they’re going to fix that. What are some of the other good stuff in the RISE that maybe aren’t as important, but still, I think, helpful. They want to do more multiple employer 403(b)s. They did this for 401(k)s. They want to make the cost of doing these 403s less. Pooled employer plan modifications.
They want to clarify name fiduciary responsibility, making it easier to do pooled accounts. They want to have a retirement plan modernization. So currently, employers, if you transfer, if you have between $1,000 and $5,000 and you leave your job and you don’t tell the employer what to do with the money, they’re going to send it to a custodian as part of the safe harbor IRA. The custodian is supposed to look for you. But a lot of times the fees just eat up and the money just ends up disintegrating to nothing.
So this way they’re going to increase that from $5,000 to $7,000. Again, remember, if you leave your employer, ask, Do I have a 401(k)? A lot of people don’t know because they didn’t put any money in and they didn’t realize their employer was doing non-elective contributions. And they may have $500, $1000, $2000, $3,000. If you don’t ask and you don’t tell the employer to port it to either your new job or to an IRA at Schwab or IRA Financial, it will go to a custodian who will monitor the safe harbor IRA. They’ll put you in literally like a money market and strip the fees out and before you know it, they’ll be nothing left. So, ask!
What else? This is pretty cool. They want to be able to allow employers to offer the minimus financial incentives, like gift cards, to participate in a plan. IRA Financial is doing a token program.
And the way we’re doing it is, we’re doing, like, a price reduction of either $50 or $200. And you’ll get, like, an Ethereum token called IRAFI. Right now it’s just cash. But the reason I just can’t give you a bonus is because there’s an antiquated 1993 rule, a ruling that says if you have less than $5,000, all you can do is a $10 incentive. And if you have more than $5,000 in your IRA, the most you can do in this incentive is $20.
What’s the incentive? The incentive is, hey, open an IRA, start saving, and the company, IRA Financial, will incentivize you to keep doing this. It’s your benefit. We’re not paying off to get accounts.
It’s $10 or $20, but we would have done $50. And unfortunately, the rules now are so antiquated that it’s like $10 or $20, which in 2022 is stupid. So there’s a provision that’s going to increase that, which is good. They’re also going to increase coverage for part-time workers in retirement plans.
Also, they’re going to do, like, some type of lost and found. So they’re going to create this database so you can go in and type your name and see if you have any outstanding retirement accounts. There is a way to do it now, but it’s not very current and the technology is not great, but they want to increase the spending on that. So you can type in Adam Bergman, go to this website and I can be like, oh, my God, I have money from this law firm I worked at 20 years ago, and guess what? It’s $2,000 now. Let me grab it. So they’re creating this national, like, lost and found database. Kudos, good job. It’s about time. Good stuff.
I probably get, our company, maybe gets 50 calls a week from random people saying, hey, can you help us find our IRA or 401(k)? And our team is just like, no, we can’t help you. You need to call your employer. Well, they went bankrupt. Yeah, it sucks.
That’s why if you leave your job, ask even! If you don’t think you have a 401(k), ask human resources. Hey, do I have a 401(k)? Do I have any money in it? Because you’ll be shocked how much money; there’s billions and billions of money sitting there in IRA custodians’ accounts, who are just charging fees for people that don’t even know they have an IRA. It’s crazy. There’s billions, literally billions.
What else is good? They want to prevent an IRA from being disqualified in the event of prohibited transactions for the entire one they want to use, like the 401(k) rules. So if you have $200 grand in your IRA and you screw up with $50, your $200,000 IRA is not blown up, only the $50 is. So good rule.
They want to modify the starting point for statute of limitations for private transactions. Again, they didn’t need to be in the BBB bill. The BBB bill has a provision to extend the statute from three to six years. That should be in this. It should be in RISE.
Can Changes to IRAs be Included in Budget Reconcillation?
It should never been part of budget reconciliation, but IRAs are technically tax-related, so it could be part of budget reconciliation. So they’re slamming it down our throats, using retirement accounts as a way to pay for other programs. Not doing it in a bipartisan fashion. Don’t agree with it. Not a Democratic thing.
Republicans have screwed up in the past, too, and have also abused budget reconciliation process. So just a bad system that should go away. There are procedures and rules to get laws passed. This is not the right way of doing it.
What’s the outlook? Well, there’s a good chance this is going to get passed. A lot is going to depend, obviously, on COVID. A lot is going to depend on what happens with the BBB. Does it get passed? But again, this passed unanimously.
Both SECURE Act 2.0 and RISE. Our insiders are telling us that by, there’s a good chance ,mid-year this gets done. And there’s optimism that the RISE/SECURE Act 2.0, most of it will be done in 2022. But obviously the Senate needs to develop its own package and there needs to be some type of reconciliation with the House to make sure that the provisions are uniform and then there will be a vote on it. The key people here are Senator Portman, Republican Ohio, and the ranking member, Brady of Texas, both Republicans and even Chairman Neal.
I think there’s a good opportunity for consensus and negotiation on both sides because most of the stuff is positive and will help Americans in blue and red states, all of us. Republicans, Democrats, Independents, good stuff here. Just wish they would have taken some of these provisions from the BBB and decided to put them in the RISE Act. Even if they couldn’t get every policy initiative like the cap or some of the other provisions, they could have got some. And again, good legislation usually takes time to boil and develop, and that’s just a good process. I don’t think rules should be created in a vacuum.
I don’t think one or two senators or members should just be able to create rules and dump it in a bill and force it down our throat because there’s a majority, especially when it comes to retirement accounts, because it impacts not just a segment of the population. It impacts hundreds of millions of Americans in a system that works. So there you go. I do think there’s a chance, as I mentioned, there’s some good stuff. They’re going to increase RMDs, make it easier to get into 401(k)s, reduce penalties for screw ups and RMDs, play around with prohibited transaction rules on IRAs, increase catch-up contributions over the age of 60, and overall it’s very positive.
So I hope RISE/SECURE Act 2.0 gets passed. I do hope the IRA provisions in the BBB bill do not make it in. Again, there are provisions in the BBB bill I support. I think a lot of Americans support. Maybe it’s a little too expensive based off the fact that we have 7% inflation.
But some of the policies are good stuff. They’re going to help all of us. I think they just got a bit greedy. And that’s kind of why I think that the bill died. And you can see retirement legislation should be bipartisan. It works. Democrats, Republicans always agree. And that was the criticism I heard from Republicans I talked to in the Ways and Means Committee when the House passed the tax provisions, they just felt they were ignored.
This thing was rammed down their throats. They have very good working relationships with the Dems on the Ways and Means Committee and they were just disappointed. At the same time, they’re just like, hey, we know this is the way the politics game is played in DC. If you have budget reconciliation, you have that opportunity. You may not get it again for many. many years.
So this is a chance to get everything in the kitchen sink done, but sometimes it just doesn’t work out. So overall, pretty positive stuff. I’ll obviously keep all of you up to date, but those are the five major retirement law changes that could come in 2022. And I think for the most part they’re are, all, all positive. And I’m encouraged that some format of the SECURE Act 2.0 and RISE will get passed this year and will benefit all of us.
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