Contributed by: Kali Hassinger, CFP®, CSRIC™
The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement, passed in late 2019. This legislation was designed to encourage retirement savings and make significant changes to how inherited retirement assets are distributed. We have written about the Secure Act a bit over the last two years or so (you can read some of our posts here, here, or here), and now, it seems Congress is considering some additional ways to encourage Americans to save for retirement.
It is, of course, important to note that this is still being debated and reviewed by Congress. The House passed a version of The Secure Act 2.0 on March 29th, but the version that the Senate could pass is expected to differ and be revised before ultimately hitting President Biden’s desk. Some of the key changes that the House and Senate versions of the Bill include are highlighted below:
Automatic Retirement Plan Enrollment
The new Secure Act would require employers with more than ten employees who establish retirement plans to automatically enroll new employees in the plan with a pre-tax contribution level of 3% of the employee’s compensation. A 1% increase in contributions would be required each year until reaching at least 10% (but not more than 15%) of the employee’s pay. Employees can still override this automatic system and elect their own contribution rate.
Boosting Roth Contributions
Roth Catch-up Contributions
Catch-up contributions are available at age 50 and, as of now, can be either pre-tax or Roth, depending on what the employee elects. The Secure Act 2.0 could require that all catch-up contributions to retirement plans would be subject to Roth tax treatment.
In addition to the current $6,500 catch-up contribution amount at age 50, they could also allow an extra $10,000 catch-up contribution for participants aged 62 to 64.
Roth Matching Contributions
There could be an option to elect that a portion (or all) of an employer’s matching contribution would be treated as a Roth contribution. These additional matches could be included as income to the employee.
Student Loan Matching
An additional area of employer matching flexibility is associated with employees paying off student loans. While employer matches have traditionally only been provided in conjunction with the employees’ plan contributions, this would allow employers to match retirement plan contributions based on employees’ student loan payments. This would give some relief to those missing retirement plan contributions because of the burden of student loan repayment schedules.
Further Delaying Required Minimum Distributions
The original Secure Act pushed the Required Minimum Distribution age from 70 ½ to 72. The Secure Act 2.0 could continue to push that timeline back as far as age 75. The House’s version of the Secure Act would slowly increase the age in a graded schedule. In 2022, the new Required Minimum Distribution age could be 73, with the age increasing to 74 in 2029, and finally up to age 75 by 2032.
Another item on our watch list is related to the original Secure Act from 2019. The Secure Act limited those who could stretch an inherited IRA over their lifetime, and many became subject to a 10-year distribution ruling. The IRS is working to provide more specific guidance on the rules surrounding inherited IRA distribution schedules. Based on the proposed regulation, non-spouse beneficiaries who inherit a retirement account on or after the period when the original account owner was subject to Required Minimum Distributions would be subject to both annual Required Minimum Distributions and required to adhere to the 10-year distribution timeline.
If or when the Secure Act 2.0 is passed into law, we will be sure to provide additional information and guidance to clients, so be on the lookout for possible upcoming blogs and webinars related to this topic. We continuously monitor, discuss, and review these changes with clients and as a firm. If you have any questions about how the Secure Act 2.0 could affect you, your family, or your business, we are always here to help!
Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion