14-Jun-21
Son of SECURE?
Take-Away: There is currently a Bill in Congress that would liberalize some of the changes to retirement plan distributions that started with 2019 SECURE Act. The Bill came out of the House Ways and Means Committee in May with allegedly bipartisan support.
Background: There is a Bill pending in Congress called the Securing a Strong Retirement Act, informally called SECURE Act 2.0 or the Son of SECURE. This Bill would expand upon some of the law changes under the 2017 SECURE Act, and would provide some meaningful relief to some of the more draconian penalties associated with excess contributions and the failure to take required minimum distributions (RMDs.) A short summary of some of the bigger changes that would be part of the second “SECURE” Act follow:
Required Beginning Date: The SECURE Act increased an individual’s required beginning date (RBD) from 70 1/2 to 72 years of age. The Bill would increase the RBD from age 72 to age 75. Apparently the delay is intended to give an IRA 3 more years to grow, or give the IRA owner three more years in which to convert their traditional IRA to a Roth IRA.
Roth SEPs: The Bill would permit individuals who have SEP and SIMPLE IRAs to open Roth SEP and Roth SIMPLE IRAs.
Employer Match: Employers would be able to match, to some dollar limit, Employee contributions to Roth IRAs (and maybe Roth 401(k) accounts.)
401(k) Catch-up Contributions: The existing ‘catch-up’ contribution of $6,500 available to individuals over the age of 50 years who have 401(k) accounts would be permitted to make even larger catch-up contributions if they are between the ages of age 62 through 64 years.
IRA Catch-up Contributions: The ‘catch-up’ contribution limit of $1,000 for contributions to IRAs if the IRA owner is over the age of 50 years would be annually indexed for inflation.
Student Loan Matches: While it is unclear how this would work, or the tax consequences of the proposal, Employers would be encouraged to ‘match’ and Employee’s student loan payments.
Suspend RMDs: If an IRA owner’s traditional IRA had a balance of less than $100,000, there would be no obligation to take an RMD from the IRA. Apparently this rule change would avoid the forced taxation of a distribution when the individual’s retirement savings are meager.
Qualified Charitable Distributions Source: At present, an qualified charitable distributions (QCD) can only be made from a traditional IRA (it can also be from a Roth IRA, but there are no RMDs associated with a Roth IRA.) The Bill would allow QCD’s from any qualified plan retirement account (e.g. 401(k) accounts.) This would avoid the ‘two-step shuffle’ that currently is required to make a QCD, by first moving funds from a qualified plan account like a 401(k) account to a traditional IRA, and then direct the distribution of funds to charities from the traditional IRA.
Qualified Charitable Distributions Amount: The maximum amount an individual can direct to be distributed from their traditional IRA to charities as a QCD in satisfaction of their RMD obligation for a year, is $100,000. The Bill would increase the amount that could be directly distributed from a traditional IRA to charities to $130,000. Another proposal would subject the $100,000 to annual indexing to reflect cost-of-living increases.
Qualified Charitable Distribution ‘Charity’: While QCDs currently cannot be made to private foundations or donor advised funds, the proposed Bill would permit a one-time only QCD made to a split-interest charitable trust, e.g. a charitable remainder trust.
Repayment of Birth and Adoption Expenses: The 2017 Tax Act permitted penalty-free distributions from IRAs to pay for qualified birth and adoption expenses, with the opportunity to repay/recontribute those expenses (without making an excess contribution to the IRA) within a specified period of time. The Bill would limit the repayment of those qualified birth or adoption expenses to the IRA to three years.
10% Penalty: Distributions from traditional IRAs and qualified plan retirement accounts prior to age 59 1/2 carry a 10% excise tax. There are already a handful of exceptions to this 10% penalty which permit penalty-free distributions from a traditional IRA for specific purposes, e.g. first time homebuyers; emergency responders, etc. The list of exceptions would be increased to permit penalty-free distributions to firefighters who are over the age of 50 years, but under the age of 55. The list of exclusions from the 10% penalty for early distributions would also be extended under the Bill to victims of domestic abuse.
50% Penalty: The Tax Code imposes a 50% excise tax on an individual who fails to take their required minimum distribution. The 50% penalty is imposed on the amount that should have been taken as a distribution but was not take as the RMD. . RMDs must be taken by December 31 of each year. Mistakes and illnesses often lead to missing the December 31 deadline, thus exposing the individual to a 50% penalty. The Bill would add effectively a ‘sliding scale’ to the penalty, taking the excise tax to 25%, or perhaps as low as 10%. This would take some (not all) of the harshness out of the excise tax regime, and could be a tacit recognition of the reality that the retirement plan distribution rules are anything but simple to understand.
Prohibited Transactions Penalty: If the IRA owner makes an investment in a prohibited transaction, the current penalty is that the entire IRA is disqualified as an IRA going back to the first day of the calendar year in which the prohibited transaction was entered. The Bill proposes that rather than disqualifying the entire IRA due to the prohibited transaction, the loss of tax deferral would be limited to the portion of the IRA that was involved in the prohibited transaction.
Saver’s Tax Credit: The Bill would increase the amount of the Saver’s Income Tax Credit from $1,000 per person to $1,500 as an inducement to save more for retirement.
Conclusion: It is hard to say in the present Congressional world of gridlock and filibuster and the hyper-partisan unwillingness to compromise, if the Securing a Strong Retirement Act, aka the Son of SECURE, will ever become law. Charities would certainly benefit, but is Congress willing to walk away from income tax revenues that it desperately needs? This Bill is something to keep an eye on towards the end of this calendar year as the members of Congress begin to gear-up for yet another campaign season. The Son of SECURE may be easier to pass than President Biden’s proposed tax increases or those included in the pending STEP Act.