In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. provides an update about possible retirement legislation that should be passed in the near future.
Update from DC – New IRA and 401(k) Rules are Coming
Hey everyone, Adam Bergman here, tax attorney and founder of IRA Financial. On today’s podcast, going to be talking about potential new IRA and 401(k) rules that could, could, could become law the end of this year. So, I was in DC last week for an industry conference and got to speak to members of the IRS, DOL, and various staffers from the Ways and Means and Senate Finance Committees. So, have some interesting updates for all of you, kind of what’s going on in terms of retirement legislation, specifically SECURE Act 2.0, which I’ll go through some of the key provisions that the staffers mentioned; they’re excited about it. And potentially will, I don’t want to say could, I think this bill is going to happen, according to the individuals I spoke to in DC, anywhere from 60% to 85%, the SECURE Act 20 is going to get passed by the end of this year and signed into law by President Biden.
This is a really good bill. Whether you’re a Democrat, Republican, it doesn’t matter. There was 414 to five vote in the House back in March 2022, when the House voted on their set of rules in the Enhancing American Retirement Act. And the Senate Finance Committee provided their own unanimous series of provisions back on June 22, and we’re getting close. Right now, there’s committees, they’re meeting a couple of times a week trying to go through the provisions and try to get a uniform bill that encompasses all the key provisions from the House and Senate bills. There’s also the Senate Health and Education Labor Pension Committee. They came out with bills called the Rise and Shine Act, which looks a lot like the Senate version, the Senate Finance Committee.
So, what’s happening now is they’re all meeting and they’re putting things together and going to come up with one bill that’s going to encompass the key and most of the provisions in the House and Senate bills, which I’ll summarize briefly, momentarily. I’ve talked about this in the past; these are really good provisions that are going to help all of us save, which at the end of the day, right, they talked about this, and I think some of the key takeaways was members of the House, the Senate, Democrats, Republicans, they work together. If we’re not dealing with abortion rights, guns, some big ticket issues; in all other facets of government, Democrats and Republicans work together, okay? It’s true. And the retirement side, the Ways and Means Committee, the Senate Finance Committee is a great example; is Democrats and Republicans, in most cases, are really in DC, they’re there to help all of us, okay? No matter all the rhetoric on Twitter and social media, people get to DC because they want to help. They want to do what’s right for the American people. It’s only in the big hot issue items where you see a lot of division, a lot of nastiness, but in most cases, whether it’s about economics, budgets, retirement, either pensions, health, labor; both sides are working together to try to come up with laws and legislation that helps all of us. So, that was really comforting to see. And something I think we all need to be reminded about is that it’s not Twitter in DC. People on both sides of the aisle are friends. They may not agree on everything, but they are very courteous, respectful, and they want to do what’s right. And they know they can’t get what they want in all cases, so there’s compromise and there’s consensus building, and it’s very nice to see. So, they’re very excited about the passage of what’s going to be SECURE Act 2.0, and so am I. I think it’s super, super positive. So, let’s get going and talk about some of the key parts of this bill.
The first one is the RMD age is going to move from 72 to 75, and that’s going to be gradual over the next ten years. Small distinctions between the House and Senate bill; the House bill, the 75, age 75 will be in 2031, whereas, the Senate side’s 2032, not a big deal. But, ultimately what’s going to happen is the RMD age is going to be extended from 72 to 75 over the next nine or ten years, and this is the stuff that the committees are working out just to get everything on the same page.
Failures to make an RMD, a required minimum distribution; they’re going to reduce that penalty from 50% to 25% and to 10% if corrected promptly. Both House and Senate have similar language. This is a good thing. They understand; listen, folks that are older, there’s medical conditions, the rules are quite complex. People forget, right? They just miss the RMD; to penalize them 50% of what they owe, it’s a major excise tax, and it’s not negligent, it’s not intentional. Just things happen. So, they’re going to reduce that to 10%, which is fair.
Another cool thing, they’re finally going to index IRA catch-up limits. Right now, IRA contribution maxes, which is $6,000 and $7,000. It’s going to go up a little bit next year – $500. It’s not indexed for inflation. 401(k) contributions are indexed for inflation. So, finally they’re going to index IRA contribution catch-ups to inflation, which is good.
Another cool thing, if you’re a Roth person, is they essentially want to give you the ability to make employer contributions in Roth. So right now, if you have a 401(k), the match employer contributions pretax. They want to give the employer the ability to do Roth. There’s question of whether they’re going to force the employer to do Roth or this is going to be optional. Obviously, it’s not tax deductible, it’s after-tax to Roth. But, this is helpful to the government because obviously they like Roth since it does not reduce taxable income and some taxpayers like Roth, including myself, because if you’re patient and you can wait till you’re 59 and a half, the Roth’s been open at least five years, you can pull all the money out tax free. So, that’s the benefit and the attraction of doing Roth.
Matching contributions for student loans. So, this is both the House and Senate bill want to add this provision that says that if the employer makes contributions to a 401(k) plan on behalf of the employees who are making student loan payments, so basically, instead of making contributions to the retirement account, the employee can say, make it to my student loan payments, and the employer can do it, and the employee will not get taxed for that income. That will be treated as a contribution, just like a 401(k) contribution. It’s seemingly the case that the contribution will be tax deductible for the employer and the employee will get student relief on their student loans. The money’s not going to go into retirement account, but it will be going to pay off student loans, which obviously that’s a huge issue for many of us that are paying off hundreds of thousands of dollars in student loans that keep compounding because of the interest.
Another really cool thing I’ve talked about, and this is something that members of the Ways and Means Committee were also super excited about, enhanced catch up contributions. So, from age 62 to 64, they want to give you the ability to go up to $10,000, instead of $6,000 or $6,500 or lesser amounts in a SIMPLE; they want to give you the ability to go up to $10,000 for catch-up contributions from 62 to 64, which is your prime retirement age, at least supposedly. So, that’s a cool thing. We’ll see how that applies to IRAs. It seems like it’s only going to apply to employer plans. 401(k)s, 403s, 457s, SIMPLEs. So, we’ll see. I’m all for this. I think after 60, it should just go 60 to 75 and just increase it to $10,000, even if it’s just Roth. Even if you say, okay, we’re not going to let pretax because we want to protect our tax basis, but we want to give you the ability to save more, why not extend it up? Right. That’s generally the ages when people have higher earning powers and are getting close to retirement so they can see the benefits. So, I’m all in favor for that and that was a provision that a lot of people on the Ways and Means Committee were excited about and something they wanted to get passed.
Another thing was leaving behind small 401(k) balances. They want to make it easier for people who leave their job and have balances under $5,000. Their employer can now put it into an IRA. They want to do that, if it’s under $1,000, you could be cashed out because there’s a lot of people out there that work maybe six months a year, two years at a business, don’t even know that the business was making employer contributions for them because they just weren’t aware of it. It was just such small amounts of money. Now, if it’s under $1,000 they want to, should just be able to cash it out. Whereas, before you have to roll it to an IRA. So that’s a cool thing. Cool option.
Another cool option, provision is that, right now, part-time, to be eligible to a 401(k) plan, it’s 500 hours or three consecutive years; well, it’s 1000 hours or three consecutive years of 500 hours. They want to move that to two years of 500 hours. So, make more people eligible for 401(k) plans. That’s cool too. I’m all in favor of that.
Another interesting provision is they want to have this emergency savings, so basically that the participant could save up to $2,500 which you can withdraw from at least once per month, and they’re after-tax basis. So, kind of like an HSA, right? But you can use it for any purpose, not just health. The Rise and Shine Acts had this at $2,500 and the Senate bill had this at $1,000 for personal family emergency. So, we’ll see how this works. The Senate bill said you can pay it back over three years; kind of like a mini loan. I think they should add kind of a loan feature like a Solo to the IRAs, maybe not make it $50K, maybe make it $10k or $15K. So, this way if you take it out you have a chance to pay it back without just losing it. But this is a step in the right direction and we’ll see where the Senate and House committees fall on this and how they agree to a final provision.
What else is interesting? They want to set up this kind of missing database. So, if you do jump around jobs, as I mentioned previously, some people don’t know they are enrolled in a 401(k) cause there’s auto enrollment, and let’s say they’re just taking out like $30 a pay period or $50, you may not know. So, you leave your job and you don’t even ask about your 401(k) because you never even knew you were a participant, right? You never enrolled, there was auto enrollment, no one ever told you anything about it or you signed a bunch of documents when you got hired and there it is. You’re part of a 401(k). So now, there’ll be some type of database where you can type in your social or some information and find out if you have a retirement account; kind of like a retirement savings lost and found. There’s billions and billions of dollars in there that people are just not aware of and guess what happens? These funds move from a 401(k) to what’s called a Safe Harbor IRA, and then the Safe Harbor IRA administrator, over the years, just eats up that account in fees. They try to look for you and maybe your name is John Smith or Robert Smith, can’t find you and guess what? Within a couple of years, there’s no money left because they’ve taken fees out of the accounts to look for you. So, that’s something that’s going to happen. That was another thing actually, the Senate Finance Committee was really excited about.
They want to increase savers tax credit. They want to make more people eligible for the savers tax credit, which is worth either 50%, 20% or 10% of contributions made to an IRA, for a maximum credit of $1,000 or $2,000 if you’re married filing jointly. They want to increase the income cut off and expand how many people qualify, which is good, right? They want to expand it to $83,000, basically from $68,000. More people involved; encourage more people to save. Save, get a credit for what you save. It’s a great thing. The whole concept is this: whether you’re a Democrat, Republican, in the House, Senate want more Americans to save. It’s a good thing. We all can agree on that. It’s based off mathematics. Retirement system works; compounding returns; Albert Einstein 8th wonder of the World; your money should double every eight years assuming an 8% rate of return. More Americans that save, better off they’re going to be at retirement. The more money they’ll have, or have for their family. It’s a good thing, right? This way, not everyone’s a burden on Medicaid or Social Security and we have a private retirement system. We cannot rely on the government. We hope Social Security will be there in 10, 15, 30 years, but no guarantee. So, we need to take matters into our own hands and the retirement system is the way to do it. Yes, Social Security helps, but it’s not enough. You need to have your own retirement accounts or your golden years may not be so golden, okay? So, it’s super important, something Democrats and Republicans can all agree on.
Auto enrollment. This is what I was talking about. Get people auto enrolled. Statistics show if you just enroll them in a 401(k), they’re not going to opt out, they’re going to just stay in it and, at the end of the day they’re going to have more money when they retire. So, auto enrollment works. There’s a difference in the House and Senate bills. In the House, it would require employers to automatically enroll employees in 401(k) plans for at least 3% and then increase each year. Whereas, the Senate does not propose auto enrollment. Instead, there’s a provision that would generally require auto enrollment plans to check every three years. So, House is more forceful in the auto enrollment and Senate is a little bit more laissez faire, but there’ll be some agreement and there’s probably going to be some middle ground because auto enrollment does work, and it’s something I think that’s going to be more look, definitely more focused on.
What else are we talking about? Also, there’s going to be an increase for credits to start up 401(k)s for small businesses under 100 employees. Again, back to our theme, get more American savings. More Americans work at companies. And how do you get Americans to save? You force those companies, or at least incentivize those companies, to start up 401(k) plans. So, we’re going to increase the credit, so then the business owners feel better about starting 401(k), because 401(k)s do have costs, right? Besides the annual administration, cost to set up a plan, there’s safe harbor, right? Most companies do a safe harbor, where it’s about 3% match. So, if you have ten employees, the average employee makes $50K. Three percent of $50K is fifteen hundred bucks times ten employees, that’s $15K, right? That’s cash. It’s tax deductible, so assuming you have a 30% tax rate, you’re going to get a 15% deduction of the $15K, but it’s still cash flow that’s leaving your pocket, leaving your company’s bank account, going to your employees. I’m all in favor; IRA Financial does a 4% non-elective to everyone, irrespective of whether they contribute. I believe in helping employees save for retirement, but not everyone does, right? So, how do we get more people to offer 401(k) plans? We incentivize them with credits and the credit will be enhanced.
What else? Statute of limitations. So, there’s some differences in the IRA bill. In the House bill, they want to include a statute of limitation or add more language that basically adds for excise tax, where you basically, the statute, the three-year statute will essentially start when the return is actually filed. So, there’s going to be issues with that. In the case of a person required to file a return for that year, the statute will begin on the date the return would have been required to be filed, okay? So, there’s more clarity than, hey, it’s when the return needed to be filed. This provides the IRS and the taxpayer more guidance as to when the statute runs.
For prohibited transactions, generally the rule now is if you do a prohibited transaction, the entire IRA gets blown up. The House bill would only essentially target that particular transaction, not the whole IRA. So if you had an IRA with $100K, and you did a prohibited transaction on $20K, only the $20K would be disqualified and taxable, not the rest. Good provision. It’s the same rule as 401(k)s. They want to now offer that same comfort to IRAs, so this way you screw up, you don’t kill your whole IRA and blow it up, only that specific transaction gets blown up. That’s a good thing.
SEP and SIMPLE IRAs. They want to add a Roth provision, both the House and Senate. So, you can make contributions in Roth; right now, SEPs and SIMPLEs are pretax. They want to give you the Roth. Another theme, other than auto enrollment and getting more people involved, is adding more Roth options. Why? Governments need to pay for this bill, and if they can get more people to do Roth, less deductions, more taxpayer revenue, it’s another way to help pay for some of these other provisions.
I talked about tapping the 401(k) for emergencies. Another cool thing is the Senate bill wants to eliminate Roth 401(k) RMDs. There’s no requirement and distributions for Roth IRAs, but there still is for Roth 401(k)s. There’s an easy workaround because all you need to do is just roll the Roth 401(k) money to a Roth IRA before 12/31 and then you have a zero balance on 12/31 in your Roth 401(k), so there’s no RMD, but they just are like, what’s the point of doing all that shenanigans? It’s stupid. Just don’t have RMDs for Roth 401(k)s, since they do not exist for Roth IRA. I’m cool with that.
And the last provision I want to talk about in the Senate is that they basically, the way it works now, is if you set up a Solo K in ’22 for the ’21 year, you can only do employer contributions, not employee deferral. They want to give you the ability to also do employee deferrals. Again, incentivize more people to set up plans, get more people involved, whether it’s a sole proprietor, employees, also Rothification, get more people to make contributions in Roth.
Those are the two major themes of SECURE Act 2.0. The idea is this is going to get passed in the next six weeks. It’s going to be part of a larger bill; there’s generally no chance this gets passed on its own, but there’s budget bills that need to get done so this will get passed along these budget bills. I was in DC last week and DC’s dead. What I mean, dead, I mean, there’s no one on the streets. Why? I guess everyone’s in their home jurisdictions doing what they do best, right? Lobbying for votes. It’s election time, right? So DC was so quiet. I guess everyone is still home from COVID. This was my first time in DC since COVID and it was super quiet, but even quieter because staff, members of Congress, Senators, and all the crew that goes along with those folks are all in their home jurisdictions looking for votes, campaigning. But, I thought I’d see just more lawyers and more lobbyists and just regular DC folks, office folks, but it was super quiet. I went for lunch twice to like a salad place and to another lunch establishment that’s usually super packed, really popular, and they were dead. And I asked the individual at the cash, is there a holiday? Do I not know what’s going on today? And they’re like, no, it’s been dead since COVID. No one has come back to the office. Is it even quieter? Like, yeah, it’s definitely campaign time, so it’s even quieter than usual, but even without the election coming up or just past, midterms, it’s still super quiet. People are still at home because of COVID, so if you haven’t visited DC and you’re planning on, just FYI, it’s good as a tourist because there’s a lot you can do. The streets are bare. I went to a couple of museums. It was empty. It was so much fun, but DC, I love the energy of DC, it just was quiet.
Anyways, but that’s my update from DC. SECURE Act 2.0 will pass; I’d give it 80% to 100%, it’s going to happen. It’s a good bill. If you remember Build Back Better Bill, which did not pass, thankfully, last September, that was a bad bill. This is a good bill. Just like SECURE Act 1.0, SECURE Act 2.0 is a good bill, if you are in favor of retirement savings. There’s nothing bad for Self-Directed IRAs, nothing bad for alternative assets. This is a good bill that’s going to encourage more people to save. There’s Rothification, which I’m fine with, too. But overall, the theme, again, is incentivize people to save and get people to save in Roth, which I’m all in favor of.
So, there it is. I do encourage people to visit DC. It was good to be back; haven’t been there a couple of years, and just so much to see. Some new museums popped up as well. And it’s quiet, so you can pretty much have the city yourself. Great food. So, it was fun to be back and definitely check it out. So, other than that, appreciate you guys spending some time with me today. Have an amazing day and subscribe to this podcast, if you haven’t, give us a like too. And take care. Be well, and I’ll talk to everyone again next week. Be well.