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Secure Act 2.0: A Gateway to ‘Rothification’ of Retirement?

What you need to know

  • Jamie Cox considers a package of 146 pages, which increases the age of RMD and much more.
  • Those who make compensatory contributions to retirement plans will have to do so on the basis of Roth, he says, which has pros and cons.
  • But the tax penalty has been reduced for those who do not take RMD.

The Ensuring a strong 2021 retirement law passed by the Household Methods and Resources Committee on Wednesday. Although there is a long way to go in the legislative process, the bill, called Secure Act 2.0, has the attention of advisers like Jamie Cox.

The 146-page package aims to increase the required minimum age for distribution from 72 to 75 over a 10-year period. To see also : How to get a larger Social Security check. It also extends automatic enrollment in retirement plans and improves plans 403 (b).

Was designed mainly for technical corrections to the initial security bill passed by Congress in 2019, says Cox, a member of the LPL financial subsidiary Harris Financial Group in Richmond, Virginia.

But it contains provisions that will please some and frustrate others, he points out. Furthermore, it seems to push more investor savings into non-tax deferred individual retirement accounts, meaning the Roth IRA which represents a significant shift, according to Cox.

Cox has been in advisory activity for 25 years and is active on the LPL’s Political Action Committee to discuss with legislators how policy reforms are affecting both investors and advisors. He was also a member of the advisory board of the Pension Insurance Institute for about a decade.

If the bill passes as it stands now, he says, those who pay contributions to retirement plans (who must be 50 or older) “will be forced to give them on a Roth basis.”

In other words, “they will no longer be allowed to pay as tax-deferred contributions,” explained Cox, who helped clients withdraw from firms such as Verizon and American Electric Power. “It’s a big part of increasing revenue. This concept has appeared several times and is called ‘Rotification.’ ”

For a veteran advisor, this provision in Safe Act 2.0 “is a mini-rotification and it applies to water testing.” Compensation contributions are mostly made by those who have already made the maximum contribution of the deferred tax, he points out.

“This [measure] this includes that Roth will catch some tax money. It’s a pretty big step away from what we’ve seen, “Cox said. “This is the beginning of something bigger and will be an increasing part of the retirement planning contribution that Roth will need.”

At the same time, of course, “It’s possible that tax deferral options will be increasingly banned in retirement plans,” because Congress wants to find more tax dollars, he said.

For some people, this approach may be “a good thing, because there are many people who would not do it otherwise [savings in] Roth bills, ”Cox points out. These accounts allow retirees to withdraw money tax-free.

“On the other hand, if you’re the type of person who wants to defer tax, this move works against you,” he added.

“I am afraid it will be easy next time [Congress] he wants to increase revenue, start reducing regular contributions to the IRA … and only to Roth, ”Cox said. “They tried to do it in Trump’s tax bill. This is the second bite of an apple. ”

Provision in the Law on Tax Reduction and Employment from 2017 would be necessary Roth treatment contributes to catching up; it was eliminated before the law was passed.