The U.S. Senate is currently working on a pair of related bills, introduced this week by Sen. John Kennedy (R-La.), that would raise the required minimum distribution age from 72 to 75 for certain retirement accounts and also allow workers who don’t have access to a workplace retirement plan to increase their IRA contribution limit.
They’re called The Keeping Your Retirement Act and the Increasing Retirement Amount Act, and they’re worth keeping an eye on because they could mean major changes for retirees and soon-to-be retirees.
What are required minimum distributions all about?
Currently, as soon as you turn 72 you have to start making annual withdrawals from your retirement accounts, whether you need them or not. These so-called RMD are designed to make sure people don’t just stash money tax-free in their retirement accounts and then never use it, but the result is that many people are making premature withdrawals that are depleting their savings before they need it.
Per Sen. Kennedy: RMDs “also increase the taxable income of seniors who are still working, which may push some seniors into higher income brackets and potentially increase their tax liability.”
What would change?
The Keeping Your Retirement Act would do just what it sounds like: let retirees keep their retirement money longer by raising the RMD minimum age to 75.
The Increasing Retirement Amount Act, on the other hand, would “increase the IRA contribution limit to $12,000 per year for individuals without a retirement plan at work and boost the IRA contribution limit to $15,000 per year for individuals who are at least 50 years old and who don’t have a workplace retirement plan.”
The Senator speaks: “Americans cannot contribute more than $6,000 per year to their IRAs, whether or not their employers offer a retirement plan. Contributions to traditional IRAs are tax-deductible. In 2017, 50% of IRA owners who contributed to their traditional IRAs made the maximum contribution. As of March 2020, 29% of American workers did not have access to a retirement plan through their employers.” — Sen. John Kennedy (R-La.)
My take: Like many government programs, the tax implications of retirement savings plans are very outdated. RMDs at 72 make more sense when the average lifespan is barely 70, but these days many retirees can expect to live 25 years or more in retirement, meaning they’ll likely need their savings later on. Pushing the RMS age back to 75 is a good first step, but there is much more reform coming to the retirement system that’s worth watching, especially as more and more Baby Boomers enter their retirement years.