Congress is officially set to move forward with legislation that will alter the retirement saving landscape once again, more than a year after passing landmark legislation that rattled Americans in and near retirement as well as their retirement savings plans. Coined as the SECURE Act 2.0, the House Ways and Means Committee unanimously approved a markup of the legislation to be sent to the House floor for a full vote before it makes its way to the Senate Chambers. The legislation’s official title is,
Securing a Strong Retirement Act of 2021 and it looks to advance on much of the progress that was included in the original SECURE Act.

The original SECURE Act, titled Setting Every Community Up for Retirement Enhancement Act, was passed in December of 2019, and was signed into law by former President Donald Trump. At the time of its passing, the legislation was one of the biggest retirement reforms in recent years eliminating the stretch-IRA, raising the required minimum distribution age, and eliminating the age limit for retirement plan contributions, among other items. The new legislation looks to expand on some of these provisions such as increasing the required minimum distribution (RMD) age again, but incrementally over the next ten years.

By raising the RMD age, retirees will have more time to allow their accounts to grow before being mandated to make withdrawals. Prior to 2020, the RMD age was 70 and a half years old which was then raised to 72 in the first SECURE Act. Should the SECURE Act 2.0 pass through Congress and be signed into law by President Biden, the RMD age would immediately increase to 73 as of January 1, 2022. According to the current language of the proposed legislation, it would then take several more years for the RMD age to rise to age 74 on January 1, 2029, and then finally reaching 75 on January 1, 2032. If this legislation does become law, individuals who are 63 or younger in 2021 would be able to delay their RMDs to age 75 once the full increase is in place.

Ultimately, by raising the RMD age investors who have money in traditional IRA vehicles will have more time (if their age qualifies) to increase the total amount of their investment by not having to take withdrawals. Even just a few extra years can help a retiree build their nest egg, especially since traditional IRA accounts are tax deferred. The potential issues that could arise from these incremental increases is confusion among retirees about when to take their RMDs and making sure that they do so correctly to avoid penalties for withdrawing too early or late or simply not accepting their required payments because they have no guidance of when they should take them. If these provisions are rolled out for the public, it will be important for investors to ensure that they are receiving the proper advice to handle their retirement investments and take full advantage of the age increase.

Another important update in the proposed SECURE Act 2.0 is increasing the catch-up contribution which gives older workers over the age of 50 the ability to invest more money, above the limits set by the Internal Revenue Service (IRS), to bolster their nest egg in the years before they reach retirement. The additional benefit of making a catch-up contribution is that investors will also be lowering the amount of taxable income for that tax year, ultimately reducing the amount of money owed to the IRS. As of January 1, 2021, the catch-up contributions set by the IRS are $1,000 for IRA accounts, $6,500 for traditional 401(k) and other workplace retirement plans, and $3,000 for SIMPLE retirement plans. What legislators hope to achieve with the SECURE Act 2.0 is to raise those contribution limits from $6,500 to $10,000 starting at age 62 through 64 and from $3,000 to $5,000 for SIMPLE plans. The legislation would keep current contribution limits starting at age 50 with the additional increases coming into effect starting at age 62.

Legislators have stated that these proposed increases will also be indexed for inflation and will go into effect starting in 2023. It is unclear whether the additional increases will remain after age 65, or if the contribution limits will revert to the original contribution limits for individuals over the age of 50. Now, the language of the proposed legislation seems to indicate that the increases for catch-up contributions will only impact those who have reached the ages of 62 through 64 to provide a few brief years of extra support to strengthen their retirement nest egg.

The SECURE Act 2.0 legislation also looks to expand access to 401(k) plans by setting up automatic enrollment for employees in new company plans along with other provisions dealing with matched contributions to assist with student loan repayments. Currently, the language of this bill is subject to change as it was first sent to the House of Representatives on May 5, 2021 and must go through more legislative channels before it can finally be sent to the Senate and eventually to President Biden’s desk for signature. Proponents of this legislation are confident that the bill will be passed with overwhelming bipartisan support in the Congress, but with the current state of domestic political affairs, bipartisanship is never a given, especially with policy decisions involving economic issues.

Two of the foundational aspects of the SECURE Act 2.0 deals with the raising of the RMD age and the three-year period where investors will be able to contribute exponentially more in terms of a catch-up contribution. This combination will enable retirement investors to grow their nest egg for a longer period than previously allowed which may lessen some of the retirement strain that many Americans have and are currently experiencing. Delaying the RMD age to 75 over the next ten years will create larger income payments for retirees in tandem with their Social Security benefits and any other investments that they may have.

Sponsors of the legislation also anticipate that the SECURE Act 2.0 will help generate more than $27 billion in tax revenues over the next ten years. It is important to remember however that if this legislation is signed into law, individuals already receiving RMDs from their investments will continue as the provisions in the bill are not retroactive to include those who already had their RMDs delayed to age 72. If this legislation does become law, retirees and those nearing retirement should make sure they get educated about the changes that will directly impact their retirement goals to ensure their retirement strategy still aligns with their best interest and to take advantage of boosting their savings if applicable when the time comes.

As more data becomes available about the economic impact of the coronavirus on retirement planning, multiple studies have shown that retirees and individuals nearing retirement age were not as negatively impacted through their retirement plans as one might expect. While this is the good news, the bad news is that there still is a retirement crisis taking place in the United States. Prior to the pandemic, Americans nearing retirement were struggling to adequately save, forcing some to delay their retirement plans which has caused stress among individuals in the senior population. Although the pandemic continues to affect the country, mass vaccinations have put the country on a path to recovery and certain indicators have shown a healing economy. 

A 2021 retirement preparedness study found that during the pandemic, setting money aside for retirement was among the top priorities for savers. The lowest priority for respondents was focusing on their investment portfolios with 49% of respondents between the ages of 45 and 75 stating that they did not know how the assets in their investment portfolios were allocated. This statistic is concerning for individuals planning for retirement because it shows that nearly one half of investors nearing the end of their career do not have control over their investments or the knowledge to maintain their investments and are therefore leaving themselves at risk. 

Although saving money was a high priority for individuals in and nearing retirement, according to this study, 60% of respondents felt as if they did not have enough money saved. While the pandemic certainly slowed most working individuals’ ability to put money away for retirement, researchers found that although saving money was a high priority for Americans, not many savers had a retirement plan in place. More than 70% of respondents stated that they did not have enough assets to justify creating a retirement plan. While this data does seem contradictory to respondents saying that saving for retirement was a priority, it shows that there is a lot of confusion about where the economy is heading, what the future will hold for most retirees, and highlights how insecure the process of retiring has become for Americans. The data also lends credence to the importance of working with trusted financial advisors who specialize in retirement planning, which this study did not analyze. 

Furthermore, the same study underscored several retirement issues that respondents were worried about saving for, including higher healthcare costs bankrupting their nest egg, preserving their nest egg in retirement, and protecting themselves from a market crash. After collecting this data, the surveyor’s asked a broad question about living in retirement and 47% stated that they were comfortable, but less than 5% of those who said they were comfortable said that they were living the dream. This study was similarly aligned with data released from the Employee Benefit Research Institute (EBRI) which has conducted several studies throughout the course of the pandemic to analyze respondents’ feelings and preparedness for retirement. Interestingly however, EBRI’s study group was more content with their retirement situations and found that more respondents were staying true to the retirement plan that they had formulated during their working career. 

The EBRI research focused specifically on retirement age individuals between the ages of 62 and 75 and narrowed their focus on how people in this age group spend money during retirement. EBRI found that more than 45% of survey respondents felt that they had saved less money during their working career than the amount that they need to satisfy their retirement needs — 18% felt that they saved more than what they needed. The study also looked at what was most prioritized by the respondents in terms of safeguarding their nest egg in retirement. 81% of the respondents stated that their top priority was maintaining their health in retirement and having enough assets to cover healthcare related expenses. 

It may be some time before economists and researchers have a full range of data to depict the true effects of the pandemic on retirees and their nest eggs, but recent studies have shown that the shutdowns and drop-in economic activity did not have as much of a drastic impact on saving for retirement. The data from both studies indicate that there are still complications with saving and peace of mind as most retirees still find themselves worrying about whether they have enough money to last their lifetime and cover certain expenses. Instead of focusing on traveling and spending time with families, retirees in the EBRI study were focusing on not spending down their assets so they have a high balance to cover unexpected expenses like the high cost of medical care. 

Younger savers like the ones depicted in the first study showed evidence of general confusion when it came to saving for retirement. Saving money was a high priority for respondents during the pandemic, but they did not pay much attention to where their assets were being allocated in their portfolio and did not feel as if having a retirement plan was justifiable if their assets did not reach a certain level. This raises the question about having a financial advisor which neither study covered but could certainly help savers in and near retirement develop a plan regardless of the size of their assets. Retirement preparedness was a large issue for the United States prior to the pandemic of 2020 and going forward it looks like it will continue to be an issue for retirees and those preparing for retirement.

Personal debt plays a large role when it comes to saving for retirement and living as a retiree. Soaring debt resulting from increasing medical costs, credit cards, loans, and more limit the amount that workers can save and how much retirees can use in their golden years. Government deficits on the other hand are an elusive form of debt that occurs when annual government expenditures are larger than their yearly revenues. While deficits can have an impact on the short-term outlook of retirement security, the long-term effects of deficits building up over time can be much more damaging, especially if lawmakers continue to ignore the growing problem.

Some politicians and economists have sounded the alarm on the insurmountable level of debt that has been accumulated over the last twenty years, but no significant action has been taken. Since 2009, the national debt has increased $17 trillion dollars and increased rapidly in 2020 as the government spent more than $6 trillion in response to the coronavirus. As a result, the national debt has ballooned to more than $28 trillion and has the potential of reaching $30 trillion before the end of 2021. Not to be confused with the deficit however, which is the yearly amount of debt assumed by the country, the national debt is the accumulation of deficits year after year representing the grand total of money owed by the country. Most Americans pay no mind to how fast the nation’s debt is increasing, while others worry that it could cause the eventual downfall of the United States on the world stage. 

While the thought that the national debt could lead to the eventual downfall of the United States is unlikely to occur, the long-term impact of skyrocketing debt will eventually lead to higher taxes, inflation, and an extremely volatile economy for investors — 2020 highlighted this volatility. As debt substantially increased, the government issued more Treasuries to cover new spending deficits being added from large stimulus packages to keep the economy afloat. Following the basics of supply and demand, as the volume of Treasuries in the market increases, the interest rates paid on those treasuries naturally decreases, ultimately hurting the interest rate environment in the long run. When the interest rate environment takes this kind of a hit, bonds, certificates of deposit, and savings accounts become less attractive for investors. 

Since the onset of the COVID pandemic, banks have offered less than 1% on many of their investment vehicles, such as CDs. This has made it difficult for investors to grow their retirement savings, let alone keep up with inflation especially when the stock market initially crashed in March of 2020. Furthermore, when the interest rate environment struggles, investors turn to the stock market, exposing themselves to market risk and fees while jeopardizing their principal in the process. 2020 and 2021 have been prime examples of how short-term debt obligations can damage and bring uncertainty to the field of retirement investing. 

Although low interest rates have caused the stock market to reach record highs, stocks eventually must come back down. The gradual shift that has taken place on the stock market in recent weeks is a window to the eventual long-term impact of rising debt. Stimulus bills have been the largest expense adding to the massive annual deficit created in responding to the pandemic, but temporary one-time stipends paid to eligible taxpayers has some economists fearing that pent up demand will explode into the market as the country reopens which could cause the economy to overheat. A sudden rise in economic activity could trigger inflation and cause interest rates to rise to reflect stronger economic activity. Recently, Treasuries have risen by a couple basis points which have jolted the stock market into a turbulent selloff. While increasing interest rates would be welcomed news to risk adverse investors with money in bonds and CDs, this shift would correspond with a gradual or rapid decline in the stock market, hurting investors who stayed on board a sinking ship. 

If interest rates increase substantially, consumers would feel the sting in other sectors of the economy as well, specifically relating back to paying down personal debts. Mortgages and student loans would become more expensive with increasing interest rates forcing consumers to focus more of their funds to pay down their own personal debt; this leaves less income available to invest in retirement accounts. Although interest rates and stock market volatility are seen as short-term effects of deficit spending, the long-term effects are dependent on how the debt is addressed by lawmakers. At the end of the day however, the national debt plays a silent but potentially deadly role in the realm of retirement investing.   

Finally, aside from the constant threat of inflation decreasing economic output, consumers could lose purchasing power if the government decides to raise taxes. The largest portion of revenue collected by the federal government is by way of taxes and considering lawmakers are generally reluctant to cut spending, the other avenue frequented by policymakers to address the nation’s debt crisis is to increase revenue. Similarly, to how inflation reduces how far a consumer can stretch a dollar, higher taxes mean less income in the pocketbooks of Americans, which creates a similar ripple effect that limits how much consumers are able to save and spend in their retirement. 

Ultimately, these basic examples highlight how deficits, and the total national debt are more interconnected to retirement saving than many investors realize, and it is a problem that has gone unchecked for far too long. It would be impossible to condense all the nuances of the national debt and how it impacts short term and long-term retirement saving, but it is important for investors to have a general understanding of what dangers potentially lie ahead as the country recovers from the coronavirus pandemic, especially if their retirement funds are left at risk on the volatile stock market. 

A spike in annuity sales from the fourth and final quarter of 2020 suggests that there is an increasing trend of investors looking for safer investment alternatives to high-risk stocks, bonds, and mutual funds. Overall annuity sales were up 2% compared to the final quarter of 2019, with certain principal protecting annuities like fixed deferred vehicles skyrocketing 41% in the fourth quarter of 2020 — 8% for the entire year. Companies like American Equity witnessed steady growth in their financially secured instruments, increasing sales of fixed index annuities by 23% at the end of 2020 compared to the final quarter of 2019. One potential explanation for the increase in annuity sales is the safety of the financial life insurance industry and the benefits of guaranteed principal protection, especially for investors who are looking for avenues to secure their retirement funds.

The financial life insurance industry is highly regulated by each individual state throughout the country, as opposed to securities investments, which are governed and regulated by the federal government. Each state elects or appoints an insurance commissioner who is in charge of overseeing the insurance companies in their respective state. If an insurance company fails or cannot meet their financial obligations to policyholders, state guaranty associations step in to protect the invested assets of the policyholders by taking over the insolvent insurance company in a process called receivership. Prior to liquidating the insurance company’s assets, the state insurance commissioner may attempt to revitalize the failing insurer, this is known as rehabilitation. During this process, policyholder’s accounts are kept whole and secure in their investments, which is a stark contrast to Wall Street when the market crashes or a stock loses value.

While investors may be limited in their ability to add or subtract funds from their annuities when an insurance company falls into rehabilitation, they can rest assured that their money is safe. Their assets will be protected up to the state guaranty association’s protection cap, similar to how the Federal Deposit Insurance Corporation (FDIC) insures up to a certain amount of funds invested in a bank. Each state’s guaranty association determines what level of benefits will be protected in the event of an insurer falling into receivership.

Should the state commissioner determine that the failing insurance company cannot be rehabilitated, the company would be declared insolvent, and the assets of the company liquidated. This triggers the state guaranty associations to kick in and provide continued benefits to policyholders until their assets can be successfully transferred to a solvent insurer. In the event of a multi-state insolvency process, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) will coordinate with the participating state commissioners to facilitate the multi-state liquidation process.

Overall, the role of the state insurance commissioner, the state’s guaranty associations, and the NOLHGA is to protect consumers. They do this by ensuring that policyholders continue to receive their policy benefits when an insurance company becomes financially unstable, and to successfully transfer liquidated assets to solvent insurers so that the consumer can continue receiving their invested benefits without hesitation or delay. Unlike the securities industry where investors risk losing all their principal, the financial life insurance industry actively looks to protect their consumers even when there is an issue of insolvency, or failure to meet certain financial obligations to policyholders.

The level of protection and care for the consumer in the financial life insurance industry is unequivocally unmatched and lends reason to why safe annuities — financial life insurance investments — are gaining more attention in the overarching financial industry. It is important for investors to remember that although annuities come from the financial life insurance industry, not all annuities are principal protecting vehicles that guarantee security during a catastrophic economic event, such as a stock market crash. Variable annuities, for example, are insurance products that also happen to be high-risk securities. They are tied to mutual fund portfolios that can leave an investor’s money at risk of losing principal. Furthermore, these vehicles come with costly brokerage fees that erode the value of the investment over time, even more so during down market trends. As a result of their ties to the stock market, these vehicles are regulated by the Securities and Exchange Commission (SEC) and not recommended for retirement planning.

Safer instruments in the financial life insurance industry, like fixed and fixed index annuities, are recommended for retirement planning because they protect investor’s principal. Not only do the vehicles themselves protect the consumer, but they are backed by an industry that has an immense state-by-state safety net that ensures the financial peace of mind of the annuitant policyholders. As a result, these investments are sometimes referred to as Crash Proof Vehicles™ by licensed retirement phase experts in the industry. The reason for this designation is due to the fact that these vehicles are insulated from the volatility of Wall Street and have survived every major stock market crash since the creation of the life insurance industry during the 18th century.

Furthermore, the financial life insurance industry witnessed another major economic event in 2020, surviving the pandemic-induced stock market crash while keeping investors safe, as opposed to individuals who lost significant portions of their retirement nest egg; upwards of 30% at the peak of the market crash. Many investors learned that there is not a safety net for security investments, and in response, protected portions of their assets with Crash Proof® alternatives. These vehicles have security, income guarantees, and are backed by an industry that has the consumer’s well-being in mind to ensure their retirement investments are on solid ground.

The protection of assets is one potential explanation for the increase in annuity sales at the end of the 2020 calendar year. Eliminating market risk and costly fees can expand retirement investing and the spike in sales indicates a shared sentiment among investors to secure their nest egg and have opportunities for growth. The benefits of the financial life insurance industry extend beyond the principal protecting Crash Proof Vehicles™ that are available for investors, and spans across the entire industry which has never gone bankrupt or left consumers at risk. Compared to the stock market, the financial life insurance industry is set up in the best interest of their consumers, whereas the stock market is constructed for the brokers, the money managers, the hedge funds, and more — anything but the individual investors. In the end, when planning for retirement, investors can choose a financial industry riddled with volatility, risk, and corruption, or a financial path of security in an industry with safety nets and guarantees.

When saving for retirement, investors have a multitude of options to save their money. Two popular types of investments for retirement savers are traditional and Roth IRAs. Both traditional and Roth IRAs offer tax-free growth for the life of these vehicles and have unique attributes that can assist investors in achieving retirement security and peace of mind. Each year the rules regulating IRA contributions for both traditional and Roth accounts are updated and play a major role in how investors save. While some of the newer changes are rather minor compared to previous years, some changes can have a significant impact on the IRA environment, specifically by way of taxes.

Most recently in 2020, IRA regulations received a significant overhaul with the passage of the SECURE Act, which ultimately ended the Stretch IRA for designated beneficiaries. In terms of contributions, however, the SECURE Act eliminated the maximum age that an account owner can contribute to an IRA, meaning that as long as an account owner has taxable earned income, they can continue to invest in their IRA, even if they are taking required minimum distributions. While there were not as many changes from 2020 to 2021, it is important that investors in or planning for retirement are aware of the limits and regulations for making contributions to their traditional or Roth IRA accounts.

Traditional and Roth IRAs have similar but unique rules when it comes to contributions, and staying up-to-date with changes puts investors in the best position possible to fully take advantage of the retirement vehicles and avoid any potential pitfalls. Traditional IRAs were introduced to investors in 1975 and offer a tax-deductible contribution that grows tax-deferred for the life of the vehicle with the stipulation that when the investor reaches age 72 they will be mandated by the IRS to take required minimum distributions. This vehicle is popular among working investors saving for retirement because the contributions made to a traditional IRA not only have the benefit of being funded with pre-tax dollars, but also have favorable tax implications that could reduce an investor’s income tax liability in the present date when filing their taxes each year.

When it comes to filing income taxes, investors have to be wary of whether or not they can take a full deduction, limited deduction, or no deduction from their IRA contributions. If the IRA owner is an active participant in a workplace retirement plan — 401(k), 403(b), pension, or a SIMPLE IRA — the amount of income that is filed by the participant will determine whether or not the investor will be able to deduct their traditional IRA contributions when they file their taxes. An IRA owner who is not an active participant in a workplace retirement plan has the ability to deduct their entire IRA contribution for the year. In other cases where the IRA owner does participate in a workplace retirement plan, then they would have to check their tax filing status, which is determined by filing as a single individual, filing jointly with a spouse, or filing separately from a spouse.

Each of these categories contains certain income limits that the filer cannot exceed if they wish to make a full or partial deduction. The traditional IRA income limits and modified adjusted gross income (MAGI) must be examined based on any of the three aforementioned categories to determine the deduction status of an investor’s IRA contributions. Single filing active participants may take a full deduction of their IRA contributions in 2021 if they make less than $66,000. A limited deduction can be made if they make between $66,000 and $76,000 in 2021. Anything above $76,000 would result in the single filer being denied any deductions from their IRA contributions.

Married filers where one or both spouses are active participants in a workplace retirement plan also have income limits that determine if they can make a full traditional IRA deduction or not. In 2021, if both spouses are active participants they would have to jointly earn less than $105,000 a year to take advantage of a full deduction. Anything between $105,000 and $125,000 for joint filers who are both participants would result in a limited contribution, while earned income that is more than $125,000 would disqualify any deductions. On the other hand, if only one spouse is an active participant in 2021, then their income limit for a full deduction would be less than $198,000. To make a limited deduction they will have to make between $198,000 and $208,000; no deduction may be made if their earned income exceeds $208,0000. Active participants who are married but file separately generally do not qualify for any deductions unless they make less than $10,000 — in which case they can make a limited deduction.

Unlike traditional IRAs, Roth accounts came into existence in 1998. Investors with a Roth account do not have the option to make tax deductions because Roth IRAs are funded with after-tax contributions and grow tax-free for the life of the vehicle. Roth IRAs do not mandate required minimum distributions because the invested principal was already taxed. These vehicles operate slightly differently than traditional IRAs when it comes to contributions. Instead of placing deduction limits on investors participating in a workplace retirement plan, Roth accounts have contribution limits that are dependent on the income status of the tax filer.

Similar to traditional IRAs, the income categories for Roth accounts are broken down between single filers, spouses filing jointly, and spouses filing separately. Rather than limiting how much of the contributions can be deducted from their taxes, Roth accounts limit how much can be contributed based on the amount of earned income in these three categories. In order to make a full contribution to a Roth IRA in 2021, a single filer would have to earn less than $125,000. A single filer could make a limited contribution if they earn between $125,000 and $140,000, but if more than $140,000 is earned no contribution can be made. For a married couple filing jointly in 2021, to make a full contribution to their Roth IRA they would have to earn less than $198,000. Furthermore, if they file between $198,000 and $208,000 they can make a limited contribution, but they would not be able to make any contributions if they jointly earned more than $208,000 in 2021. Just like a traditional IRA, however, filing separately from a spouse hinders the investor’s ability to contribute to a Roth IRA, although they can make a limited contribution if less than $10,000 is earned.

For both traditional and Roth IRA contributions the limits are the same. An investor can put up to $6,000 in one or both of these types of vehicles in 2021; however, an investor who has both a traditional and Roth account cannot invest $6,000 into each of the IRAs. Therefore, an investor can split the $6,000 limit between the two accounts, but cannot exceed that limit. Investors over the age of 50 have the ability to add an extra $1,000 into their accounts each year, raising the yearly limit to $7,000 in what is known as a catch-up contribution. Catch-up contributions are important for investors over the age of 50 because it allows them to save more money for retirement in a traditional IRA, Roth, or split between both. On top of catch-up contributions every couple of years to maintain pace with inflation, the IRS will increase the contribution limit by $500 in what is known as a cost of living adjustment (COLA). A COLA has not been applied for 2021 and it is not yet known if an adjustment will be made in 2022.

Another important rule about IRA contributions is that investors have until April 15, 2021, to make a 2020 contribution if they haven’t already exceeded the $6,000 investment threshold — $7,000 if the investor is over the age of 50. Making a contribution before taxes are due on April 15 of any year has financial benefits for those making a contribution into a traditional IRA. Not only can an investor make a tax-deductible contribution to a traditional IRA, but that contribution would also decrease the amount of taxable income for the current tax year, resulting in potentially paying fewer taxes.

Although most of the major IRA changes occurred in 2020 when the SECURE Act went into effect, IRA rules and regulations are updated each and every year. It is important for investors saving for retirement and living in retirement with these vehicles to stay up-to-date with all of the yearly changes that could impact their IRA accounts to ensure that they are taking full advantage of contribution increases and other changes.

When preparing for retirement it is essential that investors transitioning into the retirement phase of their lives have a financial plan in place to ensure that their assets are protected and are not outlived. One of these preparations includes the process of taking required minimum distributions from a traditional IRA or 401(k) after reaching age 72. In essence, a required minimum distribution is defined as a yearly withdrawal that must be taken from retirement accounts — such as a traditional IRA — as mandated by the Internal Revenue Service (IRS). Not following these distribution rules would result in significant fines or penalties that are associated with the value of the assets in the eligible account or accounts.

Traditional IRA and 401(k) retirement accounts are required to have a portion of the funds withdrawn on a yearly basis because they are funded with income that has not been taxed. Although the money invested in these accounts grows tax-deferred, when the owner reaches age 72, they must begin taking their required minimum distributions. Depending on what the IRA or 401(k) is invested in, or if the account owner has eligible funds to continue contributing to their accounts, an IRA or 401(k) may continue to grow while taking withdrawals each year. Roth accounts are not required to take these distributions because taxes were already paid on the income that funded the accounts — thus Roth accounts grow tax-deferred with after-tax money.

Prior to the SECURE Act going into effect in 2020, the required minimum distribution age was 70 ½ years old; however, the legislation raised the age for new retirees to 72. Individuals who were already taking distributions from their eligible retirement accounts were not impacted by the age increase. Furthermore, individuals who invested in a Roth IRA or Roth 401(k) account were also not impacted by the changes set forth in the SECURE Act, since required minimum distributions are not mandated for those types of retirement accounts. Effective January 1, 2022, the distribution factors used to calculate required minimum distributions for traditional IRA and 401(k) accounts will be updated and impact all eligible account owners.

Required minimum distributions are calculated using one of three life expectancy tables, depending on the status of the individual receiving the distributions. First, there is the Single Life Expectancy Table which is used by designated beneficiaries who inherited an IRA or 401(k) before 2020 and are stretching the inherited account using their own life expectancy. The SECURE Act put an end to the “Stretch IRA” which allowed an inheritor to take distributions over the course of their lifetime and instead replaced that with a 10-year rule mandating that all funds be withdrawn from the account while also paying taxes on the inherited money. Most IRA owners will use the Uniform Lifetime Table unless the sole beneficiary of the account is a spouse who is more than 10 years younger than the account owner — in which case the Joint Life Expectancy Table would be implemented.

In 2018, former President Trump issued an executive order instructing the IRS to update the life expectancy tables to reflect longer lifespans among Americans living in retirement. As of November 2020, the IRS released their official updates to the life expectancy tables which are set to go into effect starting in January of 2022. This means that all required minimum distributions after December 2021 must be calculated using the new tables and as a result, yearly distributions will be moderately reduced across the board. The following are examples of the changes being made to the life expectancy tables and how that will impact IRA owners and beneficiaries.

A designated beneficiary who inherited an IRA prior to 2020 would have the option to stretch the account over the course of their lifetime using the Single Life Expectancy Table; beneficiaries who inherit an IRA after 2020 must withdraw all the funds from the account within 10 years following the year of death of the account owner. In the case of stretching the IRA, however, if a designated beneficiary received an account at age 53 in 2019, they would start taking their yearly withdrawals in 2020 — one year after the death of the owner.

RMD = IRA Balance ➗Distribution Factor (Life Expectancy)

In table 1 below, the beneficiary would be 54 years old and under the current Single Life Expectancy Table, they would calculate their distribution using a factor of 30.5 years. In 2020, and in each of the following years, that factor would be reduced by 1 until the funds were depleted or the beneficiary passed; therefore, the distribution factor for 2020 would be 29.5 years for this designated beneficiary.

When the new tables go into effect in January of 2022, the beneficiary will have to find the original age that they began receiving distributions. In this example, at 54 years old the new Single Life Expectancy Table would have been calculated using a distribution factor of 32.5 years. Since the beneficiary would be 56 in 2022, they would subtract 1 for each year that they have taken a withdrawal until they reach their current age, which would result in a distribution factor of 30.5 years to calculate their 2022 distribution.

The Uniform Lifetime Table is for IRA owners taking distributions after reaching age 72, or IRA owners who were taking distributions prior to the 2020 age increase. An IRA owner who was 73 in 2019 and already taking distributions would have calculated their withdrawal using a factor of 24.7 years (Table 2). At 74 in 2020, that distribution factor would have reduced to 23.8 years and again to 22.9 years in 2021 at age 75.

When this owner turns 76 in 2022, their calculations will switch to the new Uniform Lifetime Table and use a distribution factor of 23.7 years (instead of 22.0 years) indicating a reduction in their overall required minimum distribution for the year. Compared to the previous table their withdrawal would be increased by a factor of 1.7 years, which would indicate a reduction in the total cash distribution when switching to the new table.

The third and final distribution table used by IRA owners is the Joint and Last Survivor Expectancy Table and is used only if their spouse beneficiary is more than 10 years younger than the IRA owner. If the owner of an IRA were 73 years old in 2019 and their spouse was 60 years old (Table 3) they would use a joint distribution factor of 26.8 years. In 2020 that factor would be reduced to 25.9 years when the IRA owner turned 74 and their spouse 61. The following year in 2021, when the IRA owner turns 75 and their spouse 62, they would use a distribution factor of 25 years.

Just like the other life expectancy tables, when the calendar changes to 2022 the new tables will go into effect, and a new joint distribution factor will be used to calculate their required withdrawals. When this IRA owner turns 76 and their spouse 63, the distribution will be 25.9 years according to updates made by the IRS. As a result, their required withdrawal for the year would be reduced by a factor of 1.8 years compared to what would have been their distribution if they had used the previous life expectancy table.

Although these changes are set to go into effect in 2022, it is imperative to prepare for these changes by meeting with a licensed retirement phase expert to ensure that you are taking the correct amount of money for your yearly required minimum distributions. By taking more than the required amount from a traditional IRA or 401(k) you could be on the hook to pay more in taxes. To avoid this, a licensed retirement phase expert can assist you in staying up-to-date with the newest regulation in the continually changing IRA investing environment and help you maintain peace of mind throughout retirement.