The SECURE 2.0 Act, included in the year-end omnibus bill approved by Congress (Consolidated Appropriations Act, 2023), features 100 retirement provisions that focus on improving taxpayers’ ability to save long-term, but one change may not work as intended.
“Congress took on more social issues than expected in this bill,” Jamie Hopkins, managing partner of wealth solutions at Carson Group and author of Wall Street Journal best seller Find Your Freedom, told Checkpoint. “They called out the importance of having an emergency fund, the issues around terminal illnesses, domestic abuse, and college funding. While they did not directly address these issues, they highlighted their negative impact on society and provided some relief through tax and retirement provisions.”
Compared to its predecessor, SECURE 1.0—which Hopkins described as a “stealth tax increase” package—SECURE 2.0 is a “good common-sense bill” that is “really designed to enhance retirement savings,” but does not ultimately combat systemic issues impeding families’ ability to retire, he said.
One potential unintended consequence of the Act, according to Hopkins, is that lowering the required minimum distribution (RMD) penalty tax under Code Sec. 4974(a) from 50% to 25% (or 10% for those who quickly correct) may end up resulting in a net tax revenue increase. The theory is that the 50% rate is an effectively encourages taxpayers to withdraw RMDs, and that reducing the penalty could allay the fear of penalization, leading to more taxpayers missing their RMDs.
However, “the IRS doesn’t apply [the penalty] very often,” Hopkins said in an interview with Checkpoint. “It almost seems unfair to hit somebody with a 50% penalty tax on top of their ordinary income tax.” He added that in his personal experience, which mirrors that of many other financial advisors, he has not had clients who missed their RMDs and were actually hit with the penalty, as if the 50% rate was intended simply to influence taxpayer behavior and not function as a severe punishment.
If more taxpayers fail to take out RMDs, then IRS may be emboldened to apply it more often, Hopkins hypothesized, especially with the agency’s additional funding of $80 billion over the next 10 years by way of the Inflation Reduction Act (PL 117-169). IRS staff has been “stretched thin,” he said, and there is “not really a system designed today to track” missed RMDs “in a meaningful way” outside of an audit.
Observation. Between more taxpayers potentially neglecting to take their RMDs because of less fear of penalty—or perhaps confusion over the current required age (which is set to ramp up over time to 75 in 2033)—and the IRS’ new resources or appetite to impose the penalty, the SECURE 2.0 provision could rake in more taxes overall.
Hopkins said none of this is baked into the Congressional budgeting model and lawmakers are not making assumptions based on behavioral predictions, but “it’ll be very interesting” to look back five years from now and analyze the frequency of missed RMD measured against amounts of applied penalty taxes.
“Today, most Americans do not make enough to save for the future,” said Hopkins. “Social Security still remains on the back burner and needs to be funded. Medicare needs reform. And while the bill discussions long-term care once, this is perhaps the biggest crisis facing retirees in American and largely has been left unaddressed for two decades by Congress.”
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