There are some significant tax aspects lurking in proposed legislation that could have repercussions for US taxpayers, depending on income level and tax status. The impetus of the bills in both the House and Senate is to help taxpayers save more for their retirements.
BACKGROUND: The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) became law on January 1, 2020, altering the rules applied to retirement accounts such as 401(k)s or Thrift Saving Plans. One significant change was to raise the age at which Required Minimum Distributions (RMD) had to start from 70 ½ to 72. SECURE also did away with the “stretch out” by which a beneficiary of an inherited retirement plan could establish an inherited IRA and stretch out RMDs for the beneficiary’s lifetime. With a few specific exceptions, the inherited retirement account must be cashed out and income taxes paid in ten years. The SECURE Act did not directly address encouraging people to save more for their retirements.
Among the proposed legislation that would encourage people to save more:
- House version: “Securing a Strong Retirement Act of 2020” (aka SECURE Act 2.0) proposed by the chair of the House Ways and Means Committee and the ranking Republican member originally in October 2020.
- Senate version: “Retirement Security and Savings Accounts of 2021” proposed in 2021.
- House version: “Encouraging Americans to Save Act” (EASA), introduced by Rep. Judy Chu on April 4, 2021.
- Senate version: “Encouraging Americans to Save Act”, introduced by Sen. Ron Wyden on July 22, 2021.
Highlights of the SECURE Act 2.0:
- The SECURE Act 2.0 would give retirement savers aged 62-64 the chance to make much larger “catch-up” contributions to their workplace retirement plans, starting in 2023. They could make their standard yearly contribution, plus an additional yearly catch-up contribution of up to $10,000 during that three-year period. For 2021, the yearly contribution is capped at $19,500, and for 2022, it is capped at $20,500. There is an over-50 catch up contribution of $6,500 for both years.
- Employers who sponsor defined-contribution plans would have to automatically enroll eligible employees with a base 3% contribution rate, increasing 1% a year to a ceiling of 15%, unless workers choose to fund their accounts differently.
- Tax-deferred retirement accounts have RMDs currently starting at age 72. The SECURE Act 2.0 would increase that RMD threshold to age 73 in 2022, 74 in 2029 and 75 in 2032.
- The legislation would require the Treasury Department to make taxpayers more aware of the Retirement Savers Credit. It would convert it from a non-refundable tax credit into a refundable credit which means that lower income taxpayers who owe no taxes would receive a payment. As currently structured, married taxpayers can claim a non-refundable credit for contributions to a tax-deferred retirement plan as long as their combined adjusted gross income (AGI) does not exceed $68,000. The amount of the eligible contribution cannot exceed $1,000 per person, and the amount of credit that can be taken depends on income:
50% up to $20,500 up to $10,250
20% $20,501-22,000 $10.251-11,000
10% $22,001-34,000 $11,001-17,000
0% over $34,000 over $17,000
- The legislation would also add an option of converting retirement plans into lifetime-income annuities to provide a source of guaranteed income in retirement and would establish a national database to track lost of misplaced retirement accounts.
What are the differences between the SECURE 2.0 legislation and the EASA legislation?
- SECURE 2.0 is a more comprehensive program to address how people to save more toward retirement.
- EASA would reform what is currently a tax credit (the Retirement Saver’s Credit) into a federal matching contribution to middle- and lower-income taxpayers’ retirement accounts. These accounts could be an employer-sponsored plan or an individual’s IRA. It would also re-establish “MyIRA”, a Roth IRA plan created during the Obama administration that was to be maintained by the Treasury for those without access to an employer’s retirement plan. The match would be deposited directly to the taxpayer’s retirement plan not sent as a tax refund. The match would phase out at a slightly lower income level — $32,500 for single taxpayers and $65,000 for married filing jointly. The maximum match would be $500, the same as the refundable credit under SECURE 2.0.
More rule changes might be ahead, because the SECURE Act 2.0 is slowly making its way through Congress. Introduced in 2020 with bipartisan support, some aspects of the SECURE 2.0 Act overlapped with tax proposals in the “Build Back Better” Plan (BBB), the multi-trillion-dollar budget reconciliation bill. As Congress struggles to pass big legislation in 2021, it appears that SECURE 2.0 has been set aside but is expected to be reintroduced in 2022. The BBB version passed by the House in November 2021 deleted some retirement provisions similar to features of SECURE 2.0 and EASA and retained others:
- BBB limits contributions to IRAs based on the balance of a taxpayer’s combined retirement accounts and annual income level. The capped balance is $10 million, and it applies to incomes above $400,000 (single or married filing separately), $425,000 (head of household) and $450,000 (married filing jointly). This provision would impede a taxpayer from making the $6,000 annual contribution or $7,000 if over aged 50 and is effective beginning in 2029.
- BBB imposes a tax on employers of $10 per employee per day not automatically enrolled in a retirement plan unless the employee opts out. This provision would take effect in 2023.
- BBB would require distributions from existing retirement accounts when the combined balance exceeds $10 million, effective in 2029.
- BBB eliminates “backdoor” Roth IRA conversions for high income taxpayers beginning in 2032.
- BBB would have established the refundable credit for the Retirement Saver’s Credit of up to $500 per person, but that provision was eliminated from the final version.
BBB has moved to the Senate for deliberation and vote, so it is possible that the Senate may change the version that passed the House.