(1) Senate Is Still Working on "SECURE Act 2.0"
The House recently passed H.R. 2954 Securing a Strong Retirement Act of 2021 by a 414-5 vote. Here are some of the proposed changes:
- Would increase the age of required minimum distributions from 72 to 75, which would allow older employees to work longer.
- Would increase catchup contribution limits to $10,000 for workers who are 62, 63, or 64 years old.
- Would increase the limits of qualified charitable distributions from retirement plans.
- Would require employers to auto-enroll eligible employees (but employees can opt-out).
- Would allow employers to treat student loan payments as if they were contributions to a 401(k) and match those "contributions."
The Senate is still working on its version of the bill, and bipartisan approval is expected:
- "[B]ipartisan approval is also expected, after a few minor changes. . . . I believe we’ll see passage of this bill by the Senate and signed legislation this year, all with significant bipartisan support." Gene Marks, Retirement savings reform is a good idea that both parties can get behind, Guardian, April 24, 2022 (Apple News link).
- On May 27, 2022, Jeff Levine shared the following updates about the Senate bill on Twitter:
(2) Saving for Retirement Is a Challenge, And Many Don't Save Enough
Saving for retirement is a challenge, perhaps one of people's biggest. "Building a healthy nest egg to live off of in retirement is probably one of the biggest challenges you may face, especially when you have competing priorities," writes Derenda King in How Your Retirement Savings and Income Are Taxed, Kiplinger, April 28, 2022 (Apple News link).
Generally, people do not save enough for retirement:
- "Very few people--unless they're in a job where they make a great deal of money, and they've been just fantastic savers, or they're the tiny percent of people who get a wonderful employer-provided pension--very few people have as much cash flow in retirement as they had pre-retirement when they were still working full time at their chosen job or profession," says Clark Howard, a personal finance expert. Jessica Bebel, Should Your Retire Your Mortgage?, Morningstar, March 4, 2022 (Apple News link).
- Gene Marks, Retirement savings reform is a good idea that both parties can get behind, Guardian, April 24, 2022 (Apple News link): "Of course, it’s no secret that people aren’t saving enough for retirement. A recent survey from the Federal Reserve found the median amount of savings in Americans’ retirement accounts was only $65,000. Another study from the Insured Retirement Institute’s data found that an estimated 33% of workers are saving less than 5% of their income for their retirement and 25% of Americans have no retirement savings at all according to a report from accounting firm PWC. The Wall Street Journal warns that a generation of Americans is entering old age the least prepared in decades and, according to the Government Accountability Office, about half of households age 55 and older have no retirement savings at all."
(3) You Can't Take a Loan From or Against Your IRA
In Prohibited Transactions and Investments in IRAs (White Coat Investor, March 19, 2022), James M. Dahle explains that you can't take a loan from your IRA or against your IRA (i.e., use your IRA as collateral for a loan):
Unlike a 401(k), you can't borrow from an IRA at all. A 401(k) will allow you to borrow the lesser of $50,000 or 50% of the account value. At times, that amount may be temporarily lifted. In 2020, for example, you could borrow $100,000 or 100% of the account value. You can borrow the money for the shorter of five years or until tax day next year. But that's not an option with an IRA. You can make a withdrawal, but you can't get a loan.
Why can't you take a loan from or against your IRA? "The IRS doesn't permit IRA loans," explains Kathryn Pomroy in Can you take a loan from an IRA? (Fox News, May 25, 2022, Apple News link). "If you decide to take a loan from an IRA, despite the rules, the IRS will no longer consider the account to be an IRA -- and will require you to report the entire value of the account as income."
60-Day Rollover As Short Term Loan? Avoid It If Possible
There is a "strategy" that writers sometimes mentioned to take a very "short-term loan" by doing a 60-day rollover, but it is very risky. The rules are strict and the IRS has no sympathy for taxpayers who fail to complete the rollover by the 60-day deadline.
The 60-day rollover rule is intended to give account holders time to roll over from one retirement account to another, not to take a "short-term loan."
The "strategy" behind a "short-term loan" can be used only once every 12 months because the IRS allows only one rollover in a 12-month period. It requires 4 steps: (1) The account holder withdraws the money from an IRA, (2) takes a "short-term loan" (i.e., uses the money for some other purposes), (3) replaces the money from another source, and (4) redeposits the money in a qualified account within 60 days.
Unless step 3 is guaranteed, the "strategy" is awful. Investopedia gives an example of where a "short-term loan" can work: "[I]f you need $4,000 to help pay for a child's tuition this month, but you won't get paid again until next month, you could withdraw the money from your IRA and use it as a short-term loan and simply replace it once you get paid."
The rules are complicated the risks are detrimental. Investopedia also explains: "If you don't follow the 60-day rule to the letter, not only will the funds be subject to income tax, you'll also pay a 10% early withdrawal penalty if you are younger than 59½."
"Using your IRA for a short-term loan to purchase real estate by doing a 60-day rollover is permitted but should be avoided if possible," writes Sarah Brenner explains in Borrowing From an IRA to Buy Real Estate (The Street, 5/27/2021). "The risks are high and the cost of things not going as planned could result in a tax bill and the loss of retirement savings — with no likely relief from the IRS."
Lawyer and writer. Husband, father of daughter, son, brother to one brother and two sisters, uncle to eight nieces and nephews, and great uncle. Has two dogs and two cats. Loves technology and music.
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