By Jamie Hopkins, Managing Partner, Wealth Solutions
The next wave of retirement planning reform is headed for shore.
The Securing A Strong Retirement Act of 2022, informally called the SECURE Act 2.0, would improve access to retirement plans, make it easier to save and remove barriers to preserving income in Americans’ golden years.
With a strong show of bipartisan support, House lawmakers this week voted 414-5 to move the bill forward and send it to the Senate, where a final version is expected to also pass. However, the Senate could make some additional changes, as they have been reviewing a similar bill since last year.
The bill builds on the SECURE Act of 2019, which offered the first evidence in more than a decade that Washington has a healthy appetite to modernize the existing retirement system.
Here’s what you need to know about the key provisions in version 2.0.
Retirement Plan Auto Enrollment
Employers setting up new qualified retirement plans like a 401(k) would be required to automatically enroll their employees in the retirement plan with escalating contribution amounts. Unless the employee opted out, employees would contribute 3% of their income initially and build to 10% of their income. This forced-saving feature takes some of the guesswork out of early retirement planning for young workers.
Businesses with fewer than 11 employees or that have been in operation for fewer than three years would be exempt. Certain plans also would be grandfathered out of this provision, but new plans would need to comply.
Retirement Plan Incentives
Under the new legislation, employers could offer employees small financial incentives – think $25 gift cards – for contributing to a retirement account. Employers who are grandfathered out of the automatic enrollment provision might leverage this update.
Required Minimum Distributions (RMDs)
The bill would push back the age at which you must begin taking distributions from your retirement accounts to 75. This provision would likely phase in over time – first moving to age 73, then 74, then 75.
The current RMD age is 72, as outlined in the 2019 SECURE Act, which pushed it back from 70.5.
[Learn More: What does the 2019 SECURE Act mean for your 401(k)s, IRAs or other investment accounts? Find out with our SecureRMD calculator.]
In pushing out RMDs again, the bill could create complex situations and a tax hurdle at death, given the 10-year rule for the distribution of many inherited retirement accounts.
It’s also important to note that while pushing back the RMD age will help some, most Americans will need their RMD dollars and then some to meet their retirement spending needs by the time they reach age 72. It’s important to work with your advisor to make sure your retirement plan strategically accounts for these RMD changes.
Employer Match for Student Loan Borrowers
Student loans can be a barrier to saving for retirement, as workers need to focus on paying down debt instead of saving for the future. As such, the SECURE Act 2.0 would allow employers to offer a match on the amount their employees pay on student loans and contribute this match to a retirement account on behalf of the employees. This can allow employees to focus on debt but still save for retirement. Additionally, the quicker employees can pay down their student loan debt, the quicker they can begin saving for retirement.
Updates to Retirement Plan Catch-Up Contributions
The current law allows individuals over the age of 50 to make additional annual catch-up contributions to their retirement accounts. Catch-up contribution limits to retirement accounts like 401(k)s and 403(b)s would increase from $6,500 to $10,000 for those ages 62, 63 and 64. If you have a SIMPLE IRA or SIMPLE 401(k), the catch-up contribution would increase to $5,000 for these ages.
Catch-up contributions would also be indexed for inflation.
Catch-Up Contributions Tax Treatment
Starting in 2023, catch-up contributions would be treated as Roth contributions, meaning they would be taxed. However, the growth could come out tax-free in the future. Remember, if you are doing catch-up contributions, you are already saving a decent amount of money into your retirement account that year.
Employer Match Tax Treatment
The SECURE Act 2.0 would allow employers to offer matching contributions in Roth dollars. Under existing law, employer matches are offered with only tax-deferred dollars. This change could help retirees build a better tax-diversified retirement portfolio. However, this could create some logistical and functional hurdles for employers in creating and managing their retirement plans.
New Flexibility to SIMPLE and SEP Accounts
Small businesses and those who are self-employed might leverage SIMPLE and SEP retirement accounts, which have contribution ceilings far higher than other retirement vehicles. The new bill would allow SIMPLE and SEP IRAs to accept Roth contributions.
[Learn more: Retirement Plans for Small Business: Comparison Chart]
Say Goodbye to the QLAC Contribution Caps
A qualified longevity annuity contract (QLAC) is an investment vehicle that can defer the taxes associated with taking required minimum distributions (RMDs) by converting funds from a retirement account to an annuity, or fixed income stream. The QLAC can defer income inside the IRA to age 85. Today, the contributions to a QLAC are limited to the lesser of $135,000 or 25% of your qualified account balance. So, if you had a $400,000 account, you could contribute only 25%, or $100,000. The SECURE Act 2.0 would remove that 25% cap.
Planning Ahead
The Senate will now review the SECURE Act 2.0, as well as a second retirement-focused bill; the two overlap each other – about one-third of the two bills is identical – so the final version might vary in some ways from what is outlined here.
In any event, meaningful changes to the retirement landscape are likely coming, with an eye toward making saving for the future more accessible and more impactful.
While the bill hasn’t made it to the president’s desk yet, it’s smart to dip your toes in the water so you’re prepared for what’s ahead and can work with your advisor to account for the changes.
Questions about your retirement plan? We can help. Reach out today for a complimentary call.
Jamie is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Jamie is in no way related to Cetera Advisor Networks LLC or its registered representatives.