SECURE Act 2.0 Set to Bring More Changes to Retirement Savings

When the original SECURE Act passed in 2019, members of Congress warned us that they’d be back with more changes to make the process of saving for retirement simpler for Americans. In the House, the SECURE Act 2.0 passed overwhelmingly with bipartisan support on Mar. 29, and last week, the Senate Health, Education, Labor and Pensions Committee (HELP) released draft legislation building off concepts in the House Bill that signaled possible forward movement on SECURE Act 2.0 in the Senate.

What can we expect in this new proposed legislation? The final bill will likely offer a little something for everyone, including workers, employers, and retirees. Here are some of the key highlights contained in the House Bill:

New Required Minimum Distribution (RMD) Ages

The 2019 version of the SECURE Act raised the age by which Americans must start taking RMDs from 70 ½ to 72. If SECURE 2.0 becomes law, the age would raise gradually to 75 over the next 10 years. The age for RMDs would first increase to 73 on Jan. 1, 2023 (for those turning 72 after Dec. 31, 2022), then to age 74 on Jan. 1, 2030 (for those turning 73 after Dec. 31, 2029), and a final time – to 75 – on Jan. 1, 2033 (for those turning 74 after Dec. 31, 2032).

A Reduction in the RMD Excise Tax

Under the 2019 SECURE Act, those who fail to take their full RMD face a 50% excise tax. SECURE 2.0 would reduce the excise tax to 25%, and even further – to 10% — if you correct your mistake quickly.

Increased Catch-Up Contributions

If you are 50 or older, you may already take advantage of the ability to make an additional contribution to your IRA or 401(k). This year, workers who are 50 or older can contribute up to an extra $6,500 to their 401(k) or 403(b) account above the $20,500 limit, or up to an extra $3,000 to a SIMPLE IRA above the $14,000 limit. SECURE 2.0 would allow workers who are 62, 63, or 64 to contribute even more – up to $10,000 in catch-up contributions to 401(k) or 403(b) accounts, and up to $5,000 for those with SIMPLE IRAs. These new catch-up contribution limits would be indexed for inflation annually.

An Expansion of Auto-Enrollment by Employers

SECURE 2.0 would require businesses with more than 10 employees, and who have been in business longer than three years, to automatically enroll eligible employees into their 401(k) or 403(b) plan at a savings rate from 3% to 10%. Contribution rates for these employees would automatically increase 1% each year until they reach at least 10%, but not greater than 15%. However, employees who don’t want to save at the automatic rate would be able to opt out entirely, save less, or save more. Government agencies and churches would be exempt from this provision, as well as companies with fewer than 10 employees, or that opened fewer than three years ago.

Enhanced QCDs

Under the current law, anyone aged 70 ½ or older can transfer up to $100,000 tax free each year from their traditional IRA directly to a charity. These donations, called Qualified Charitable Distributions, or QCDs, can count toward your RMD for the year, and they’re not taxable; however, they’re also not tax deductible. SECURE 2.0 would allow a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust. In addition, the $50,000 one-time transfer amount and $100,000 annual QCD cap would be indexed annually for inflation.

Help for Small Businesses

If SECURE 2.0 were to become law, it would enable businesses with up to 50 employees to offset more of their plan start-up costs.

Roth Contributions

Under current law, all plans that allow pre-tax employee contributions can also accept Roth contributions, except for SIMPLE and SEP IRAs. SECURE 2.0 would allow SIMPLE and SEP IRAs to accept Roth contributions. In addition, employers would be able to offer employees the ability to treat employer contributions to employer-sponsored retirement plans as Roth contributions, versus only as pre-tax contributions under current law.

While these are just a few of the provisions that may become law, there are many others that could affect those with student loans, those needing assistance to find old 401(k)s, part-time workers, victims of domestic abuse, and military spouses.

With the introduction of legislation in the Senate, we may see final legislation in the coming weeks, according to members of the Senate’s HELP committee. While it’s unclear how many provisions will make it into law, Sen. Richard Burr (R-N.C.) said the package “builds off of many bipartisan proposals to enhance Americans’ access to retirement plans, strengthen the ability of small businesses to offer plans to their employees, and improve overall savings for retirees’ golden years.” We at Savant will be ready to help you understand the impact on your financial situation if and when the bill becomes law.

Sources: IRS announces changes to retirement plans for 2022;
H.R.1994 — 116th Congress (2019-2020); IRS.gov – IRA FAQs – Distributions (Withdrawals)