With the passage of the Setting Every Community Up for Retirement (SECURE) Act in 2019, the first major retirement-related piece of legislation since 2006, many Americans began to rethink their retirement strategies.
Now, in 2022, proposals for a SECURE 2.0 are making their way through the House and Senate. Like its 2019 namesake, the SECURE Act 2.0 could shake up how Americans plan for their retirement.
What Did The 2019 SECURE Act Do?
The 2019 SECURE Act was intended to incentivize Americans to plan for and invest in their retirement. It did this by offering individuals access to a wider range of retirement-saving strategies.
Chief among these provisions:
- Raised age of Required Minimum Distributions from 70.5 years to 72 years.
- Allowed parents to withdraw up to $5,000 from retirement plans for new children without incurring a penalty.
- Virtually eliminated the “stretch-IRA” by imposing a 10-year timeframe on withdrawals for most non-spousal beneficiaries.
[Links] SECURE 2.0 Proposals
House Resolution 2954 “Securing a Strong Retirement Act of 2021”
Senate Bill 1703 “Improving Access to Retirement Savings Act”
Why Is SECURE 2.0 Notable?
The bills going through Congress are H.R. 2954 “Securing a Strong Retirement Act of 2021” and S.B. 2954 “Improving Access to Retirement Savings Act.”
The House bill, which passed late in April, would:
- Require employers that offer retirement plans to enroll eligible workers automatically at rate of 3% of salary, which increases 1% annually (up to 10%).
- Allow workers ages 62–64 to increase annual 401(k) and 403(b) catch-up contributions to $10,000 (currently, $6,500). Plus, beginning in 2023 these catch-up contributions would be taxed as Roth contributions.
- Allow employers to treat student loan repayments as elective retirement account deferrals and provide a matching contribution.
- Further raise the age for Required Minimum Distributions (RMDs) from 72 to 75.
- Require employers to let part-time employees contribute to a retirement account if they work 500+ hours a year for two years.
Let’s look at a couple of these items in more detail.
Higher Age for Required Minimum Distributions
SECURE 2.0 increases the age at which individuals must begin making RMDs, but the process is graduated. The age raises to:
- 73 starting in 2023 (for individuals who turn 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2030).
- 74 starting in 2030 (for individuals who turn 73 after Dec. 31, 2029, and age 74 before Jan. 1, 2033).
- 75 starting in 2033 (for individuals who turn 74 after Dec. 31, 2032).
Roth-style Catch-Up Contributions
As of now, employees aged 50+ can make catch-up contributions of up to $6,500 to a 401(k) in addition to the $20,500 federal 401(k) contribution limit. These contributions can be made on a pre-tax or Roth basis.
Pro Tip: The terminology can be confusing, but it’s good to have a basic fluency with these retirement account names and what they mean. Traditional IRAs (Individual Retirement Accounts) are funded with pre-tax dollars, and all tax liabilities are deferred until you begin making withdrawals. Funds in a Roth IRA are taxed before going into the retirement account, and there are no additional taxes assessed when you start withdrawing funds.
If SECURE 2.0 passes as is, the bill would increase the 401(k) catch-up contribution amount for participants aged 62–64 to $10,000. It would also require these contributions be taxed as Roth contributions (i.e. taxed before being invested).
Additionally, under current law catch-up contributions for IRAs are limited to $1,000. SECURE 2.0 would not increase that amount, but it would index it to inflation as of 2023.
If you are able to take advantage of catch-up contributions, you should. However, the truth is that catch-up contributions aren’t feasible for a large percentage of employees such as lower- and middle-income earners, who may be unable to max out their yearly 401(k) contributions.
Student Loan Payments and Employer Matching
SECURE 2.0 could provide a great mechanism for younger employees to save for retirement, especially those who are burdened with massive amounts of student loan debt.
The problem is twofold. First, employees with large monthly student loan payments generally cannot make significant contributions to retirement accounts, and they tend to have lower retirement savings overall. On top of that, employers usually base 401(k) matching contributions on an employee’s elective deferrals to retirement accounts. Obviously, if an employee’s contributions are lower, the employer’s matching contribution will be lower.
SECURE 2.0 would provide a statutory basis for employers to treat student loan repayments as elective retirement account deferrals and to provide a matching contribution.
There is a slate of other, less-expansive provisions in the SECURE 2.0 legislation as well. The House version would:
- Create an online Retirement Savings Lost & Found Database for workers and retirees to find “lost” retirement accounts, e.g. at companies that have gone out of business or merged with another organization.
- Create a tax credit for small businesses that offer a savings plan, up to $1,000 per employee.
- Increase awareness of the Retirement Savings Contributions Credit (a.k.a. saver’s credit), which is available to low- and middle-income employees.
- Revamp 403(b) retirement plans with some features of 401(k) plans.
- Simplify how employers offer lifetime income annuities as a retirement plan investment option.
- Extend defined contribution multi-employer plans to nonprofit organizations.
Critical and Evolving Situation
The House version will be headed to the Senate soon, and the Senate is likely to propose changes. Though we do not know what the final text of the bill will be, we will follow this legislation closely so we can keep you up to date.
Regardless of who you are, the SECURE Act 2.0 will affect how you plan for your retirement and what the best strategies are to secure your financial legacy.
If you have any questions about this pending legislation, how you will be impacted, or what steps you should take going forward, please reach out to me right away. I would be happy to set up a complimentary Financial Legacy Review so we can review your current retirement and estate planning strategies and fine tune them to match your long-term goals.