SECURE ACT 2.0
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 revised existing rules around retirement saving, including raising the age of required minimum distributions (RMDs) and eliminating age limits for traditional IRA contributions. There is now a new bill dubbed “SECURE Act 2.0”, that builds on the first to improve retirement savings opportunities for workers. If it has broad bipartisan support, there is a significant likelihood that it will pass this year, either as a standalone or as part of broader legislation.
A Recap of the Original SECURE Act
The 2019 legislation added some important new enhancements to existing rules about retirement saving, including:
· Raising the age of required minimum distributions (RMDs) from 70 ½ to 72. Delaying your RMD gives you more time to adjust to what your work and tax situation might be, retire a little bit later, and, when the taxable distribution is required, potentially be in a lower tax bracket.
· Eliminating an age limit for traditional IRA contributions. They can now occur at any age provided the individual has earned compensation.
· Removing the ability of non-spouse beneficiaries to “stretch out” distributions from an inherited IRA over their lifetimes. In these circumstances, the entire value of the inherited IRA must be distributed within ten years of its receipt. (Those who inherited an IRA before the SECURE Act took effect are grandfathered in and may continue to stretch out their RMDs.)
· Allowing 529 college savings plan account holders to use funds in their plan to repay up to $10,000 per year in qualified student loan debt.
· Access to penalty-free withdrawals of up to $5,000 per year from a workplace savings plan (such as a 401(k)) to help offset the costs of having or adopting a child.
SECURE Act 2.0 Version
Keep in mind that legislation currently under consideration in Congress is only in the proposal stage. While the changes laid out below are not yet enacted into law, it can be beneficial to know what may be changing and consider the potential impact on your own retirement savings and income strategies.
· A proposal in one package would allow RMDs to be delayed until age 73 beginning in 2022. Then, the required start date for distributions would shift to age 74 in 2029 and age 75 in 2032. Other proposals contain variations on that timeline, including making RMDs first effective at age 75 in 2031.
· Additionally, under current law, failure to comply with RMD requirements results in an excise tax equal to 50% of the year’s required distribution amount. New proposals would decrease the penalty to 10% or 25% if the individual promptly corrected the failure to take a timely RMD.
· Catch-up contributions allow people age 50 and older to set aside additional dollars over the standard maximum contributions to workplace retirement plans (such as 401(k)s) and IRAs. Under new proposals, another form of “catch-up contribution” would be created for those ages 62 to 64 (under one plan) or 60 to 63 (under another plan). At that point, individuals would be allowed to add $10,000 to a 401(k) or 403(b) plan. This maximum would be indexed for inflation in future years. Additionally, there is a proposal to index IRA catch-up contributions to inflation. Currently, those 50 and older can only direct an additional $1,000 per year (above standard contribution limits) to an IRA.
· Multiple bills under consideration include a provision that would allow employers to make contributions to workplace savings plans for employees who are still repaying student loans. It isn’t unusual for younger workers carrying student debt to forego retirement plan contributions in order to continue to pay off college loans. Under the proposed legislation, employers would be allowed to make contributions on behalf of employees faced with this dilemma, even if those employees do not make retirement plan contributions.
· Under current law, there are no provisions that accommodate employer matching contributions to employees’ after-tax Roth 401(k) plan contributions. One proposal under consideration would allow, but not require, employers to make such matching contributions to Roth 401(k) plans. Under current law, Roth 401(k)s are subject to RMDs (which do not apply to Roth IRAs). A proposal in the Senate plan would eliminate required distributions from Roth 401(k)s.
· Employers currently have an option to initiate “automatic enrollment” of employees into a company-sponsored retirement plan, which means employees automatically participate in the plan unless they choose not to. New proposals would require employers to provide automatic enrollment and automatic increase features to newly established 401(k) and 403(b) plans. Depending on the piece of legislation, the amount automatically deferred would start at 3% or 6% of compensation. Under one proposal, employees deferring at least 3% of their income annually into the plan would have contributions automatically increased by 1% each year until they’re contributing at least 10% of their pay, unless they choose to opt out of this feature.
· One of the Senate provisions would give employees access to emergency funds. Employers could automatically enroll workers in emergency savings accounts that could be accessed at least once a month. Workers would be allowed to set aside up to 3% of their gross salary into this account, up to $2,500. Any surplus contributions would be directed to the individual’s 401(k) plan through the employer.
Further Developments
SECURE Act 2.0 has reached full approval with the House, and the two Senate bills under consideration have achieved approval at the committee level. Stay tuned for the bill could be passed by the full Senate, but the likelihood of that occurring before year-end is up in the air.
Source: (1) https://www.usbank.com/retirement-planning/financial-perspectives/saving-for-retirement-secure-act.html
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