Employees are encouraged to save for retirement to have a large nest that can last them during their later years, especially since Social Security isn’t sufficient to sustain seniors. However, the laws around retirement savings are a bit restrictive. Take required minimum distributions (RMD), for example. Though they are not imposed on Roth IRA accounts, every other tax-advantaged retirement plan requires that the saver start making withdrawals once they hit age 72.
The RMD is calculated based on the life expectancy for the year and the account balance, and neglecting to make the withdrawal is a big deal. Individuals who fail to make the withdrawal risk face a 50% fine on the funds that aren’t withdrawn. If a retiree who is required to withdraw $5,000 for the year takes only $3,000, he/she will face a 50% penalty on the balance of $2,000.
Thankfully, the new bipartisan legislation in the house promises a lot of benefits for seniors. The bill referred to as the Securing a Strong Retirement Act of 2020 seeks to make essential changes that will give retirement savers more flexibility.
1. Increase the Age for RMD
RMDs are typically problematic. It creates a tax burden for retirees who are forced to make withdrawals they don’t need from their traditional retirement plans. RMD can also determine whether to pay taxes on your Social Security benefits or not. Making an RMD means losing out on the tax-advantage growth on the money in your retirement plan.
Currently, all retirement plans outside the Roth IRA are required to take RMD starting from age 72. However, with the new bill, the age for RMD will be moved upwards to 75, giving retirees more time to allow their money to grow. The bill also seeks to exempt retirement savers with less than $100,000 in their 401(k) or IRA account from taking RMDs entirely.
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2. Increase Catch-Up Contributions
People over age 50 are allowed catch-up contributions to their retirement account. The general contributions limit is up to $19,500 for 401(k) and $6,000 for IRA. For 2020, individuals over age 50 were allowed to save an extra $6,000 as catch-up contributions to 401(k) and $1,000 to IRA. This brings their total contribution limit to $26,000 and $7,000 for 401(k) and IRA, respectively.
According to information from the IRS, these contribution limits will remain the same for 2021. However, the Safe Act bill seeks to increase the catch-up contributions for workers over age 60 up to $10,000. This is aimed at giving prospective retirees ample opportunity to save more to their retirement account.
The bill was just recently introduced in the house and has not been passed into law, so there’s no need to get overly excited. It’s, however, encouraging to see lawmakers fight to make life easier for retirement savers.
