"SECURE 2.0" Changes Retirement Savings in Big Ways
Congress, specifically the House, recently voted overwhelmingly to pass "The Securing a Strong Retirement Act", and by overwhelmingly, I mean on a 414-5 vote. When was the last time you saw that kind of bipartisanship on a nonmilitary-related matter?
The Act quickly became referred to as Secure 2.0 because it expands on the original "SECURE" Act enacted during the previous administration. The measure now moves on to the Senate, and then if passed, to the President for his possible signature.
A hallmark of SECURE 2.0 (hereinafter referred to simply as 2.0) is the eventual extension to 75 as the age by which retirees must start required minimum distributions (RMDs) from requirement accounts. Currently, the age is 72. The RMD starting age would go up to 73 in 2023, 74 in 2030, and 75 in 2033.
The age extension, if passed, will be a game-changer for many. With increasing life expectancies and changing life goals, more and more employees are projected to work well into their 70s. Forcing them to begin RMDs while still working and not in need of the retirement money can be financially detrimental since it could be taxed at a higher marginal tax bracket than later in retirement. This gives the employee the option to avoid that taxation if the funds are not presently needed.
Another major provision expands automatic enrollment of workers in employer plans, requiring 401(k) and 403(b) plans to automatically enroll eligible employees beginning after December 31, 2023. Employees would be able to choose a contribution level of between 3% and 10% of compensation initially or opt out entirely. The initial percentage would increase by 1% each year until reaching 10% of compensation. Some exceptions would be available, such as for employers with less than 10 employees, and employers who have been in business for less than three years, among others.
At the risk of overusing the term, this is another game-changing provision, especially for lower-earning employees. It has long been a goal of public policymakers to get more "average Americans" into the retirement savings game. This provision would go a long way to accomplishing that objective.
There are other important parts 2.0 that encourage retirement savings and expanded coverage in employer plans. These include:
- The small employer pension plan startup costs credit is increased from 50% of administrative costs to 100% for employers with up to 50 employees, and credit eligibility lengthened from three years to five.
- The credit known as the saver's credit, would have a flat limitation of 50% of qualified retirement savings contributions of an eligible individual, rather than its current range of percentages from 50% to 10% (and phasing out entirely) based on adjusted gross income and filing status. A new, higher phaseout range would take effect also.
- The limit on catch-up contributions to an IRA by those age 50 and over, currently $1,000, would be indexed for inflation after 2023. A separate catch-up amount for retirement plans of $6,500 ($3,000 for SIMPLE plans) would be increased to $10,000 (and $5,000 for SIMPLE plans) for participants ages 62 through 64.
- Employers that make matching contributions under 401(k), 403(b), or 457(b) plans or SIMPLE IRA could base them on qualified student loan payments made by the employee.
- Where the SECURE Act required employers to offer 401(k) plan participation to certain long-term, part-time employees, the bill would expand eligibility by reducing the number of years that the employee must first serve (with at least 500 hours) from three to two (or, as under SECURE, by completing 1,000 hours of service in one year).
Further, 2.0 would simplify and clarify some rules by:
- Reducing the penalty for failure to take RMDs from 50% to 25% and providing for a further reduction to 10% with respect to a failure that is corrected in a timely manner (defined in the bill).
- Indexing for inflation the $100,000 annual limitation on qualified charitable distributions.
The bill also would expand the availability of Roth contributions and hardship distributions in several important ways:
- Participants in SIMPLE and SEP IRA plans would be able to make Roth contributions to those accounts.
- All amounts from 403(b) plans would be available for hardship distributions, just as they are now for 401(k) plans.
- Plans participants could opt to receive employer matching contributions as Roth contributions if they so choose.
There is something in 2.0 for almost everyone, If signed into law, it is thought it will greatly enhance retirement savings and improve the retirement lives of millions of Americans. Stayed tuned!
