part 2

SECURE Act 2.0 raises the RMD age, encouraging tax sheltering.

The SECURE Act 2.0’s costliest provision delays the age when retirees must accept minimum IRA and 401(k) distributions. The SECURE Act 2.0 would raise the age from 72 to 75 during the following decade. Minimum distribution requirements guarantee that savings incentives encourage people to save for retirement and tax savings that went untaxed earlier. Raising the age for required distributions doesn’t do anything for lower-income retirees who need their savings to make ends meet. Instead, it benefits the wealthy by allowing them to conceal more income for longer, avoid paying taxes while alive, and pass on more untaxed assets to their descendants. Using retirement accounts as a tax shelter is apparent since 99.6% of 65- to 70-year-old owners of both traditional and Roth IRAs withdrew from their traditional account in 2016, but just 17% withdrew from a Roth. 

SECURE Act 2.0’s greater catch-up limitations favor high-income savers

Another pricey element of SECURE Act 2.0 would allow near-retirees to make catch-up contributions to retirement funds. Under existing legislation, those aged 50 and older can contribute an extra $6,500 per year ($3,000 to SIMPLE IRAs). The SECURE Act 2.0 would allow 62- to 64-year-olds to contribute an additional $10,000 ($5,000 for SIMPLE IRAs) and index those amounts for inflation. A Vanguard Investors poll indicated that in 2020, just 15% of account holders made a catch-up contribution of any amount, consistent over time. 6 out of 10 account holders with incomes of $150,000 or more made catch-up contributions, compared to 1 in 10 with incomes under $100,000. 58% of individuals affected by the existing contribution limit have incomes of $150,000 or more, and the majority already had bigger account balances.

The SECURE Act 2.0 reduces the expense of increasing retirement tax advantages by encouraging saving to use Roth IRAs.

Savers pay taxes on the amounts they contribute to a Roth account, forgoing the automatic deduction for traditional IRAs or 401(k)s. Roth account withdrawals aren’t taxed, thus increasing the long-term budget costs. Wealthy account owners can use Roth accounts to pass untaxed savings to their descendants, as there’re no minimum distribution restrictions.

Privileging Roth IRAs over traditional accounts worsens existing inequities because these accounts benefit those likely to stay in the same tax bracket in retirementâ€â€higher-income households with more assets. This contrasts those who expect a lower post-retirement tax bracketâ€â€lower-income households with fewer assets. According to TPC researchers:

A Roth [IRA] shields 50% more income from tax than a traditional retirement account for the same dollar deposit. Assuming the same contribution and withdrawal behavior, the Roth IRA contribution costs 50% more (in present value) than the traditional contribution.

Other policies would benefit those more who are most vulnerable to retirement instability.

CAP study recommends reforms for the retirement savings system, including a universal Thrift Savings Plan (TSP) and revising tax-based incentives.

Other modest initiatives might better help individuals who don’t benefit from current savings incentives.

Refundable saver’s credit

Restructuring the saver’s credit, the only retirement savings incentive for low-income households, would be more egalitarian. The existing saver’s credit gives married filers with earnings up to $66,000 a small credit for contributing to a retirement plan. Due to the credit’s design, few qualified taxpayers claim it, and few receive the entire amount. Only 3.25 – 5.33% of eligible filers claimed $156 to $174.34 in credits from 2006 to 2014.

Because the credit is non-refundable, few households claim it. Non-refundability restricts households whose potential credit is more than their federal income tax obligation from getting the credit’s benefit. The House-passed SECURE Act 2.0 would enhance the credit for many middle-income families starting in 2027, but it wouldn’t make it refundable, thus, still excluding low-income savers.

Making the saver’s credit refundable and structured as a match for amounts contributed to an account will allow more of its intended audience to build substantial retirement savings. This strategy, contained in legislation by Sen. Ron Wyden (D-OR)35 and Rep. Judy Chu (D-CA), would aid households most at risk of inadequate retirement savings and decrease racial and other disparities in the existing tax system. Allowing households to utilize the “short form” (1040EZ) to claim the saver’s credit would further improve its effect, comparable to the EITC.

Increase asset limitations in anti-poverty programs like SSI

Asset restrictions in safety net programs prevent many low-income people from saving. The Supplemental Security Income (SSI) program severely limits permissible savings, providing a very low-income floor for the poorest elderly and disabled persons. People are ineligible for SSI if their assets exceed $2,000, excluding a home, one car, and household items. That restriction, which hasn’t been raised in over 30 years, inhibits people from saving even modest sums for unanticipated needs, let alone the large amounts needed for retirement security. Sens. Sherrod Brown (D-OH) and Rob Portman (R-OH) presented bipartisan legislation to index the SSI asset limit to inflation on May 3, 2022. That proposal should be incorporated into all saving-related legislation.

Stop mega IRAs

Some high-wealth households have used loopholes in the existing system to establish enormous tax-favored retirement savings accounts, compared to the modest retirement savings of most Americans. In 2019, less than 500 taxpayers had $25 million-plus accounts, averaging $154 million. Mega IRAs have exploded in the past decade. Between 2011 and 2019, the number of $5 million-plus accounts almost tripled, from 9,05741 to 28,615. Wealthy investors can use these funds to avoid capital gains taxes on the appreciated asset and estate taxes that would otherwise be due on inherited accounts.

Policymakers might minimize high-balance IRA misuse with reasonable measures, including those in drafts of the FY 2022 budget reconciliation plan.

• Limit investments to publicly listed securities, preventing well-connected individuals from sheltering gains on pre-IPO shares.

• Ban backdoor mega IRAs created by transferring employer-sponsored accounts supported by after-tax contributions to Roth IRAs, which have no MDRs. 

These measures would limit high-income households’ ability to exploit retirement provisions to generate untaxed wealth.

Contact Information:
Email: [email protected]
Phone: 9143022300

Bio:
My name is Kevin Wirth and I have worked in the financial services industry for many years and I specialize in life insurance and retirement planning for individuals and small business owners, with a specialty in working with Federal Employees. I am also AHIP certified to work with individuals on their Medicare planning. You can contact me by e-mail or phone. I look forward to the opportunity of working with you on these most relevant areas of financial [email protected] 914-302-2300