The Retirement Security and Savings Act of 2021 And You

Increase In Longevity Driving Major Changes In RMD

In 2020, the Social Security Administration determined that “a 65-year-old can expect to live another 19 to 21.5 years, on average… a third of 65-year-olds will hit age 90, and 1 in 7 will live beyond age 95. (In 1960, a 65-year-old man could only expect to live another 13 years). Remember, this is the average.

Many of your clients will live longer than these projections. The increase in lifespan of wealthy Americans is increasing faster than any other demographic. “From 2001-2014, the richest Americans gained approximately three years in longevity….” 

Proposed Change of Commencement of RMD from 72 to 75

Changing the age at which your clients must commence their Required Minimum Distribution (RMD) from 72 to 75 is one of the most significant changes in the proposed Retirement Security and Savings Act of 2021, informally known as SECURES 2.0. Just two years ago, the SECURES Act increased the age for RMD to begin from 70 ½ to 72. Yet even that change didn’t reflect the rapidly increasing life spans of Americans.  So, Congress is acting to increase it even more, although it will phase in over the next ten years.

Retirement Accounts Less Than $100,000 Exempted From RMD

Another key provision of this act is Americans with $100,000 or less in retirement savings will be exempted from the Required Minimum Distribution altogether. To be clear: you will only be exempt from RMD if your total retirement assets are less than 100K.  But remember, this is the proposed law, it has not passed Congress.

Extensive Changes In QLACs (Qualified Longevity Annuity Contracts)

The greatest fear older Americans have about retirement is running out of money before they die. To ensure you will have an income in the last years of life, you can establish a QLAC which allows you to postpone taking the Required Minimum Distribution on a portion of your retirement assets for as long as fifteen years.

Increasing The Amount You Can Put Into A QLAC

Currently, the amount you can invest in a QLAC to shelter from the RMD is 25% of your retirement assets or $125,000, whichever is less. Under SECURES 2.0, the cap moves to $135,000, and the 25% is removed entirely from the calculation. If you only have $135,000 in your retirement plan, you can invest the entire amount in a QLAC.

You must purchase a QLAC before you turn 72, and you must begin to take distributions from your QLAC no later than the first day of the month after your 85th birthday. But, you can take distributions earlier in your life if you wish, and while you will pay income tax on your RMD distributions, it isn’t as if the money is locked up until you are 85.

A QLAC is designed to be an annuity in which payments are deferred until the last years of your life. The Federal Government wants the oldest retirees to have a secondary source of income in addition to Social Security.

Catch-Up Provisions To Address Retirement Savings Gap

SECURES 2.0 also contains a catch-up provision that allows people over 60 to contribute $10,000 a year to their qualified retirement plans instead of the current limit of $8,500. Most Americans, even your high-net-worth clients, need to save more money before they retire because they are going to live much longer than before. After what we have been through with COVID-19, telling your older clients they must save more before retiring is not a message they want to hear, yet you must tell them.

Contributing Writer: Subject Matter Expert Charles McCain

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