How does the Secure Act 2.0 change your retirement plan?

Note: This is an updated article from February of last year, as there has been many changes to the act since the original article, and SECURE 2.0 just recently passed the House of Representatives and looks to be passed into law shortly.

In December of 2019, a new bill called the “Setting Every Community Up for Retirement Enhancement” (SECURE) act was passed by congress and initiated sweeping new changes to the retirement system in the United States. The act was filled with many improvements to IRA’s, retirement plans, small businesses, and college savings plans. For most people, the notable improvements included increasing the age of Required Minimum Distributions (RMD’s) to 72 from 70.5, allowing IRA contributions after 70.5, and creating the “10-year rule” for inherited accounts. There were many other minor updates that impact some people, but not others, depending on their financial situation.

Even during times of extreme polarization, improving retirement planning and updates seems to be a bipartisan issue in congress. The SECURE act passed with bipartisan support, and these changes were quickly implemented without much disagreement. It might seem preferable to let the dust settle for awhile before implementing even more changes, but there is already new legislation in the works from two members of Congress (Democrat Richard Neal and Republican Representative Kevin Brady).

This new legislation is called “Securing a Strong Retirement Act of 2022” (aka SECURE act 2.0), and it has recently just passed the House of Representatives with a 414-5 vote. It’s headed to the Senate, where it will almost certainly be voted into law.

Over the past year, a huge number of new changes have been added to the SECURE act 2.0 bill, and I’d like to summarize many of the positive changes all investors and retirees should be aware of:

Changes to Required Minimum Distributions (RMD’s)

• The starting age for required minimum distributions (RMDs) is raised from 72 to 75 over time. The age for RMDs would initially increase to 73 starting in January of 2023, age 74 in January 2030, and finally to 75 in January of 2033.
• Increase from $135,000 to $200,000 the amount of savings that is exempt from the RMD requirement if used to purchase certain types of annuities.
• Reduction of the penalty excise tax for missing your RMD from 50% to 25% of the shortfall.

Auto-enrollment in 401(k) and 403(b) Plans

• SECURE 2.0 would require employers to automatically enroll eligible workers into the companies 401(k) or 403(b) plan at a 3% of their salary.
• Enrolled workers contributions would automatically increase 1% each year to a maximum of 10%.
• Businesses with plans in place *prior* to Secure 2.0 would be exempt, as are businesses with under 10 employees

?Roth Contribution Changes

• Allows “catch-up” contributions to qualify for Roth treatment, and allows employer matches to be made in Roth 401(k) accounts.

Increased Tax Incentives for Saving in Retirement Plans

• Increases the “Savers tax credit” available to individuals for contributing to a retirement plan or IRA.
• Qualified Charitable Distributions (QCD) limit increased to $100,000 (indexed to increase with inflation), and allows for one-time distributions to charities through charitable trusts and charitable gift annuities of up to $50,000.
• Increases the tax credit for small businesses that have expenses for starting a retirement plan.

Waiving Early Withdrawal penalties for Domestic Abuse Victims

• The SECURE 2.0 would add a new 10% penalty exception in 401(k)’s and IRA’s for those who have experienced domestic abuse. The lesser of $10,000 or 50% of the account balance will not be subject to penalties upon early withdrawal.

Simplifying and Increase Participation Employer Retirement Plans

• Student loan payments can be treated as 401(k), 403(b) or SIMPLE IRA plan salary deferrals, which makes them eligible for employer matching contributions.
• Reduces the three-year requirement for 401(k) participation of long-term, part-time employees to two years.
• Requires the Department of Labor to create an online searchable database to find old “lost” 401k plans.
• Increases the “catch-up” limit for employees that are 61+ and still contributing to 401(k), 403(b), and SIMPLE IRA plans. The annual “catch-up” limit for those 62-62 starting in 2024 increases to $10,000, and increases indexed to inflation.

All these changes will have broad, positive impacts on American’s ability to save and delay paying taxes to the IRS during their retirement years. In particular, the ability to defer RMD’s to age 75 will be a large bonus to those that are forced to take RMD’s from accounts they are trying to grow. Many of the changes make it easier and automatic for people to save in their work-sponsored retirement plans, receive a significant tax break, and escape many of the limits and penalties that can impede progress. The act passed the House of Representatives in April of 2022 and is expected to easily pass into law.