Retirement Savings Bill - Secure Act 2.0

[Scott 2]

https://www.cnn.com/2022/04/06/investin ... index.html

A bill passed the house that would auto-enroll new employees in their 401k at 3% contribution, then raise it 1% a year, up to 10%. It also increases the required minimum distribution age. And reduces the penalty for not performing minimum distributions.

The article is written as though this bill is expected to pass the senate and become legislation.

I wonder if this will truly pass, and if so, what implications it has for market fundamentals. How strongly can legislation impact reversion to mean? I don't have a good intuitive feel for the scale of money they are talking about. Is it enough to move the needle?

[Lemur]

Like having the auto-box checked on organ donation.

[WFJ]

IMHO, this is not significant legislation. Puts of RMDs which provides some with high IRA balances more time to reduce through rollovers and increases the amounts that will be passed to heirs that require a 10-year withdrawal. This won't have any impact on valuations or market action.

[unemployable]

I don't see anything interesting in here.

What I'd like to see are more ways to access retirement account funds before age 59½. If you retire early you probably consider all your assets fungible in that they're all "retirement" accounts. One thing that did happen quietly earlier this year is the IRS ruled one can use any initial withdrawal rate up to 5% for 72t withdrawals. (You still have to withdraw the same dollar amount every year and I believe existing 72t schemes aren't affected. If and when the 120% federal midterm rate rises above 5% you can still use that.) I was hoping for the exemption to buy a house to double or triple as it hasn't changed with inflation/housing bubbles and for expanded options to withdraw small amounts without resorting to the intricacies of the 72t rule. Instead this is just a big yawner.

[jacob]

One thing that did happen quietly earlier this year is the IRS ruled one can use any initial withdrawal rate up to 5% for 72t withdrawals.

Which is great if you live in a state like IL that doesn't tax retirement income. 5% is enough to cover the 3- or 4%-rule whereas earlier it went with life expectancy which was too long for early retirees to withdraw significant amounts from their IRA w/o penalty or roth conversion strategies.

[Salathor]

I don't see anything interesting in here.

I think getting a larger population involved in investing--hopefully just passive investing for most "auto 401kers"--would be good for the country. I believe a big part of the modern "anti-capitalism" push (which is very real) stems from the fact that "capitalism" seems like something other people do, not common people (of course, not true, but who's teaching them otherwise?).

I'm all for it.

[bostonimproper]

I think this is probably prudent and will help to offset the inevitable sting of a SS shortfall / reduction in benefits.

[Scott 2]

Say the new auto-401k'ers and delayed RMD'ers put 10% more cash into the public markets.

1. Does this increased demand spawn a faster growth in the volume of securities? So old rules hold, but we still need to anticipate a near term reversion to the mean. Or in other words - expect very low or even negative inflation adjusted returns over the next 10-20 years. Maybe there's some more companies that move from private to public, taking advantage of the new money.

2. Alternatively - Does volume growth of securities remain constant, so the new money is effectively propping up higher valuations? This is a scenario that essentially makes generation Z the bag holders, for the millennial's retirement. Similar to how people are viewing Social Security today. We turn retirement accounts into the new pyramid, essentially replaying the SS game.


I am wondering about a scenario 2. I think it's good for me, an elder millennial. It's obviously good for sitting politicians. It would argue for a more aggressive investment strategy in the near term. But, it might also create a big problem for future generations, similar to how current US valuations have been propped up over the last 5-10 years. An argument for gen Z and beyond to favor private investment, real estate, semi-ERE, etc.

[jacob]

I am wondering about a scenario 2.

https://www.investopedia.com/younger-ge ... es-5223563

The amount of "bag" between the different generations is interesting. It's particularly interesting that it's Millennials who dominate crypto. This might well be due to being early in that class. I'm wondering if the predominant holders of gold, stamps, and baseball cards happen to be boomers.

[unemployable]

You don't have to actually cash out (redeem) when you take RMDs. Most custodians will let you simply move investments from a nontaxable account to a taxable one, and naturally they encourage this as they get to keep earning fees on it. This is what my mom does, for one IRA that's shares of a mutual fund and another that's shares of stocks. You still have pay taxes on the amount transferred, presumably from other funds, but you can stay invested.

[chicago81]

Holy Crap, how did I miss the news about there being a new 5% floor on the 72t/SEPP safe harbor? That's a game changer for a lot of folks

[unemployable]

Holy Crap, how did I miss the news about there being a new 5% floor on the 72t/SEPP safe harbor? That's a game changer for a lot of folks

Yeah I didn't find out about it for some time and was pretty surprised too. I was thinking of making a topic about it but it feels like a Wheaton level or two below the typical discussion here, something that seems beneath our standards because it smacks of being not resilient enough or we should be growing our own IRAs or borrowing a friend's or whatever.

The 72t provision is kind of a dark corner of the retirement planning world. It scares people. Financial planners in particular shy away from it because the rules are so specific, the penalties so severe and it's just easier to sell you insurance. And it seems antithetic -- you mean after all this lecturing about how I can't touch my retirement account you're telling me I can? Most custodians won't help you; you have to do the calculations and take the withdrawals yourself. But like most things you do yourself they have the best upside. And now it's even better.

[jacob]

Yeah I didn't find out about it for some time and was pretty surprised too. I was thinking of making a topic about it but it feels like a Wheaton level or two below the typical discussion here, something that seems beneath our standards because it smacks of being not resilient enough or we should be growing our own IRAs or borrowing a friend's or whatever.

Ha! I think another issue is that typical ERE cost of living tends to be below the standard deduction. Thus a ROTH conversion ladder ala https://www.madfientist.com/how-to-acce ... nds-early/ allows people to access their IRA not just penalty free but also tax free which is a better deal. Alternatively, people use the bucket system spending their taxable and ROTH money before age 59.5 and their IRA money after 59.5.

The new 5% 72t is more for those who have most of their money in an IRA (stock options, etc.) combined with a cash flow problem due to very few spending years (<5) in taxable or vested ROTH IRA accounts to draw on.

[unemployable]

Don't get me wrong; I certainly buy into the higher-level Wheaton philosophy that money is just one tool and may not be the best way to solve a given problem, or even a possible way. It's that a lot of the mechanics of managing it are more the purview of places like MMM and r/leanfire and we seem to already know the issues here. Not that I don't think there's a lot worth discussing.

The new 5% 72t is more for those who have most of their money in an IRA (stock options, etc.) combined with a cash flow problem due to very few spending years (<5) in taxable or vested ROTH IRA accounts to draw on.

Yes, this was me up until the late 2010's; I was forecasting myself very possibly running down my taxable accounts by age 57 or so. A combination of lifestyle changes, decent investment returns and the CARES Act withdrawal provision has mostly obviated this scenario.

Starting in 2023 I will be facing the opposite dilemma: I probably won't be realizing enough "ordinary income" to fully take advantage of zero federal tax liability. But I want to smooth out my income as much as possible. The solutions are, on some continuum, to take 72t withdrawals (which are on a fixed schedule once you start) and cash out savings bonds (which I want to stay in for as long as possible in the current inflationary environment). Oh well, a good problem to have, and I don't have to cross that bridge yet.

[Scott 2]

Why can't you use a roth conversion to fully take advantage of zero federal tax liability? Do you need the money in less than 5 years?

I found health insurance via ACA makes maxing out zero federal tax liability less obvious. Loss of subsidies and cost sharing, above 1.5-2x poverty line, effectively acts as a tax. Optimizing that problem would make me hesitate to use a 72t, instead of the roth conversion ladder. I want to have low earning years with heavy healthcare consumption, high earning years with less, etc.

For what it's worth, I think this a great place to answer questions like that. I find other retirement forums are primarily aspirational retirees, rather than individuals already doing the thing. It can be hard to differentiate between someone who is saying "I do this" and "well, in theory you could..." Here, it's more likely you'll get a response from someone doing the thing.

[unemployable]

Why can't you use a roth conversion to fully take advantage of zero federal tax liability? Do you need the money in less than 5 years?

That's an option if I wanted to convert amounts less than the standard deduction every year, or didn't mind going slightly over that. In any event I'm trying to stay in the zero-capital-gains bracket.

I may buy a house as soon as next year, and plan to finance it through some combination of penalty-free IRA withdrawals, cashing in the bonds and taking a margin loan against my taxable brokerage account. If my IRAs do really well -- they contain some speculative stocks -- I may just pull from those and eat the penalty.

[chicago81]

Ha! I think another issue is that typical ERE cost of living tends to be below the standard deduction.

Hah, yes, I'm pretty much an "ERE Failure" -- in terms of OMY'ing myself into Boglehead-level-assets territory.

[WFJ]

A rollover to a ROTH is almost always preferred to doing a 72t when penciled out and all probabilities of market returns, ACA and taxes are evaluated. I read another few articles about Secure 2.0 that also added some provision to allow for more use of annuities to fund the 72t withdrawals. Annuities are typically terrible products for investors, but great for Investment firms. IMHO, this was the main motivation for passing the law. Any good done by all the other provisions will cost 5x from this one provision of the law. I suspect that many firms will allow 72t withdrawals only if one signs up for their in-house annuity that crushes the investor.

https://www.forbes.com/advisor/retireme ... a%20policy.

• Make it easy to buy annuities. Many experts believe that annuities, which offer guaranteed payments for a set number of years, are a great way to increase your retirement security and remain underused. SECURE Act 2.0 makes it easier for plans to offer annuities by easing technical RMD requirements for annuity options in addition to making Qualified Longevity Annuity Contracts (QLACs) more appealing by increasing the amount of your retirement savings you’re allowed to use to buy a policy.


https://www.thinkadvisor.com/2021/05/05 ... e-rmd-age/

8. Opens the Door for ETFs in Variable Annuities
Secure 2.0 directs the Treasury Department to update regulations to facilitate the creation of a new type of ETF that is “insurance-dedicated.” The update would provide that ownership of an ETF’s shares by certain types of institutions that are necessary to the ETF’s structure would not preclude look-through treatment for the ETF, as long as it otherwise satisfies the current-law requirements for look-through treatment. Treasury regulations have prevented ETFs from being widely available through individual variable annuities. ETFs cannot satisfy the regulatory requirements to be “insurance-dedicated.”

[IlliniDave]

Some interesting changes although none of them seem actionable to me. I'll turn 59.5 next year so either next year or the year after (I forget the specifics) I'm beyond the 72t window with little concern for funding in the interim. Being a 3-legged stool dinosaur with a stout 401k balance I don't really gain much from Roth conversions. Upping the RMD age does provide some potential flexibility.

As I was hitting the exit my former employer was implementing "lifetime income strategy" in the 401k plan which for good or ill I believe is the default. It seems to be set up similar to TIAA in that money is accumulated in a "guaranteed income" vehicle to fund a future annuity purchase. They've actually made it more difficult for an employee to self-direct their investments (which I always thought was the saving grace of 401ks) with the push towards the annuities, and a push to get people pay for 3rd-party asset management. I guess I'm getting old as I'm suspicious of changes and innovation, but part of me thinks I lucked into the golden age of workplace savings plans. I suspect in a decade or two annuitization will essentially be mandatory.

[unemployable]

A rollover to a ROTH is almost always preferred to doing a 72t when penciled out and all probabilities of market returns, ACA and taxes are evaluated.

Unless you plan to spend the money now, of course. On things such as taxes and ACA premiums, which can't be taken out of a converted Roth.

I suspect that many firms will allow 72t withdrawals only if one signs up for their in-house annuity that crushes the investor.

I'm not sure why you're under the impression that you need "permission" to do 72t withdrawals. It's not their money, it's yours! You can take out any amount whenever you want. Just tell them. If they "don't let you" you can transfer the IRA to another custodian who will treat you like an adult instead. Of course the taxes are your problem, but they always are anyway, because the custodian doesn't know what your other income is and hence what tax bracket you're in.