We have been tracking with the SECURE Act 2.0 for a while now. While SECURE 2.0 has not been passed into law, we felt that you should be informed of what might happen if or when the law passes.
What is SECURE Act 2.0?
The SECURE Act 2.0 could become a new set of laws designed to help secure retirement planning for Americans. One of the major changes in this law is how it affects Roth IRAs and 401ks, which now have more restrictions on withdrawing money early. On May 5, the House Ways and Means Committee passed the SECURE Act 2.0 ( but hasn’t been signed into law yet), which raises the required minimum distribution age from 72 to 75, expands automatic enrollment in retirement plans, and enhances 403(b) plans, among other provisions. The act is essentially a follow-up to the 2019 SECURE Act (Setting Every Community Up for Retirement Enhancement Act) which was signed into law in May 2018.
What it Means for Retirement Planning
By increasing the required minimum distribution age, the SECURE Act 2.0 when passed will allow participants to keep their retirement savings invested longer and potentially see greater returns on that money than if they were forced to withdraw earlier. Automatic enrollment also makes it easier for employees who may not be aware of how much their company contributes to their retirement plan.
The SECURE Act 2.0 intends to continue to improve saving opportunities for workers and make saving for retirement easier for employees of all age groups. While most proposed provisions of the legislation would apply to plan years beginning after December 31, 2022, certain provisions would apply after December 31, 2021.
New incentives provide the opportunity for people to save more by improving retirement plans and lowering costs for employers. Here are some of the new changes taking place with updates to the SECURE Act 2.0.
Required automatic enrollment by employers
In the past, contributing to an employee retirement plan was optional, usually at 3% of pay. The SECURE Act 2.0 would require that all new eligible employees be enrolled in a 401(k), 403(b), or SIMPLE IRA and automatically have 3% of their pay deducted unless the worker opts out. The deduction level increases each year by 1%, topping out at 10%. Exceptions include businesses with less than 10 employees and business that has been open less than 3 years.
Increased catch-up contributions
The provision allowing catch-up contributions by people over 50 has been pegged at $1,000 over the normal limit since 2006, but it hasn’t made any adjustments for inflation. The SECURE Act 2.0 allows the catch-up contribution to be adjusted based on changes in the inflation rate. People over the age of 60 will also be allowed to add an additional $10,000 which is up from $6500 and also indexed for inflation, into their 401(k) and 403(b) plans. People in a SIMPLE IRA will be able to add an additional $5,000 catch-up contribution, up from $3,000 previously.
Delayed Required Minimum Distributions
The age at which people had to start taking required minimum distributions (RMDs) was raised to age 72 in the original SECURE Act. A new schedule in the SECURE Act 2.0 would increase that age to 73 on January 1, 2022, 74 on January 1, 2029, and 75 on January 1, 2032. The tax penalty would also be cut in half, currently, that penalty is 50% and will be reduced to 25%.
Permits Roth Matching Contributions
Employees participating in 401(k), 457(b), and 403(b) plans may be able to some or all of the plan’s match as Roth contributions if the plan sponsor permits it. Roth contributions would not be deductible from an employee’s gross income.
Helps Part-Time Workers Participate Sooner
Part-time workers who work for at least 500 hours annually for 2 consecutive years would now be eligible to participate in a 401(k) plan, if the SECURE Act 2.0 becomes law. This is reduced from the current regulation of 3 years.
Retirement Assistance for People with Student Loans
People with student loans could get an incentive to participate even if they don’t contribute to an available retirement plan in SECURE Act 2.0. Individuals who are making payments on their student loans but not contributing to a plan could still receive a matching contribution from their employer. The employer could contribute a matching amount based on a percentage of the employee’s salary.
Small Business Tax Credits
Small businesses with less than 50 employees would receive a 100% tax credit towards the administrative costs of setting up a retirement plan. That is an increase from the current law that offers a 50% 3-year tax credit of up to $5,000.