More than a generation ago, a bipartisan Congress added a clever new twist to tax breaks for the rich. It created a long, drawn-out tax break for rich retirees--and these days it's getting even longer.
Not even the pandemic could interfere. On the contrary, it gave lawmakers an extra opportunity to tip the scale in favor of the upscale.
They tipped it only months before the virus. They slipped a special, rich-retiree giveaway into the first pandemic relief bill. Now they're coming back with a new bipartisan bill that doubles down on, you guessed it, making rich retirees even richer.
Leading the way are Rep. Richard Neal (D-MA), chairman of the House Ways and Means Committee, and ranking member Rep. Kevin Brady (R-TX). They'll be reintroducing the second Secure Act, including a provision that pushes back the age for required minimum distributions from retirement accounts (RMDs) to 75. No matter that it was pushed back only last year from 70-Â ½ to 72; when it comes to comforting the comfortable, Congress can never act too quickly or do too much.
A quick review of RMDs:
Retirement accounts are not only savings vehicles, they're major tax breaks as well. They've given millions of workers roughly four decades of untaxed contributions and tax-free capital gains. Congress set up RMDs to ensure that the Treasury begins to collect, via yearly withdrawals, those long-deferred tax revenues.
Ironically though, the starting age for RMDs turned a tax-recovery law into a tax-holiday bonus for a privileged minority: people who don't need the money, from the affluent to the super-rich. For them it's a breeze not dipping into their accounts. Their balances just keep on growing, keep on compounding. Long after retirement, they're still not paying any retirement-account taxes.
The free pass ends only when RMDs kick in and require what most account holders have been doing for years: tapping their IRAs and 401(k)s and paying income tax on the withdrawals (which can begin starting at age 59-Â ½).
The original RMD age was 70-1/2--so, from the very beginning, the affluent were given an extra 11 years of double tax breaks on their accounts: tax-deferred capital gains and no taxable withdrawals. They added more tax-free time in 2020 when, as stated earlier, the starting age was reset at 72.
The rates for required withdrawals act as one more boon for the un-needy, starting out low and staying low. The initial withdrawal rate for most accounts is currently under 4% and won't reach double-digits until age 93. Even those rates will drop a touch starting next year, bringing them in line with the latest life expectancy data.
None of this, it seems, does enough for wealthy retirees. The revised Secure Act would push the beginning RMD age back to 75. Ways and Means Chairman Neal plans to reintroduce the second Secure Act in this Congress and expects the same "broad bipartisan support" as the original got in 2019.
The provision calling for later RMDs should get a broad bipartisan heave-ho. Besides throwing money at people who don't need it, it withholds money from a Treasury that does need it. With the federal deficit at a record high and headed higher, it's fiscal foolishness to postpone taxable distributions (especially distributions bound to be large and already delayed for over a decade).
There's no good reason for later RMDs. The one that's constantly trotted out is a fig leaf so flimsy it should be X-rated. It's being done, the argument goes, to help Americans "facing an increased risk of outliving" their retirement assets.
Please. The retirees who really face that risk often withdraw more than the minimum and tap into their accounts long before the RMD years (to say nothing of the millions who have minimal retirement savings, if any).
Shame on Congress--Democrats and Republicans alike--for shamelessly pushing another handout to the haves. Here's a better bipartisan idea to fold into the second Secure Act: automatic, federally-administered IRAs for all workers not currently enrolled in workplace retirement plans.
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