In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed by the U.S. Senate and signed into law by President Trump. The bill made sweeping changes to individual and company retirement accounts aimed at making it easier to contribute to taxes-advantaged accounts and harder for older Americans to outlive their assets[i]. Included in the changes was raising the age for taking required minimum distributions from traditional IRAs and 401(k)s from 70 ½ to 72. The bill also provided more tax incentives for employers to start and maintain retirement plans and additional options for employees within those plans.
Although these have been welcome changes, they have fallen far short of solving our nation’s retirement woes. Congress has responded to these concerns by introducing another bill targeted at aiding Americans in their retirement savings that has been dubbed, “SECURE Act 2.0”. The bill recently passed in the House of Representatives and is currently being tweaked and evaluated in the Senate before going to the President’s desk for his John Hancock. This bill once again makes sweeping changes to retirement plan savings, which will affect a large number of people. Here are a few of the biggest changes and how they might affect you!
Changes to the RMD
Lawmakers have once again targeted RMD’s as an area of improvement. The bill originally proposed in the House would move the RMD age from 72 to 75 over the course of the next decade beginning with age 73 in 2023[ii]. The Senate version of the bill takes this one-step further by eliminating RMD’s entirely for individuals with less than $100,000 across all of their retirement accounts[iii]. As with most legislation, there are pro’s and con’s to this change. Positively, the change allows retirement savers a longer period of time to experience growth in their investments before they are required to take distributions. Additionally, it gives retirees more time to plan for taxes by giving them more time to convert IRA contributions to a Roth IRA. Negatively, this change would require investors to take their RMDs over a shorter time period meaning that their distributions would be larger resulting consequently in a larger tax bill.
Current tax law allows individuals 50 or older to make additional ‘catch-up’ contributions to their retirement accounts in excess of the normal limitations. Catch-up contributions are currently limited to an additional $6,500 in 401(k)s and $1,000 in IRAs. SECURE Act 2.0 would increase these limits for 401(k) participants who are age 62-64. The limits for this age group would be raised to $10,000 and $5,000 for employees who participate in SIMPLE IRAs (a similar retirement plan type for smaller employers)[iv]. The catch (no pun intended), is that all catch-up contributions to employer sponsored retirement plans with be required to be made after taxes. This differs from the current standard, which allows catch-up contributions to be made pre-tax thus deferring taxes until funds are withdrawn in retirement. This results in a higher current tax bill for those who are accustomed to making these contributions however, it also means that they will not be liable for taxes on those contributions or investments gains in the future[v].
In recent years, it has become commonplace for retirement plans, such as 401(k)s, to provide employees with the option to make pre-tax or after-tax (also known as Roth) contributions. Some employees choose the Roth option as it allows them to begin building a tax-free bucket of money for retirement even though it results in a larger current tax liability. In addition, many employers offer their employees a matching contribution as part of their benefits package. Currently, those matching contributions are only allowed to be made pre-tax. SECURE Act 2.0 would change that and allow employers to make matching Roth contributions if that is what their employee elects to do.
Another change that could be coming to employer contributions is the ability for the employer to make contributions on behalf of their employee to match that employee’s student loan payments. The problem with student loan debt has been well documented and it is no surprise that this weighs heavily on younger client’s ability to contribute to their retirement. This new rule would allow employers to help their employees get off to a good start while they are still paying off debt[vi]
It could be some time before these changes go into law and the bill could change substantially by that point. However, it is prudent to be aware of the potential changes before they happen.
This week’s song is from a band that I recently discovered and have enjoyed listening too. Hope you enjoy it!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.