The Secure Act 2.0 will affect your retirement, but how? Is it just another mindless sequel? Let’s take a deeper look.
The House of Representatives passed a package of retirement reforms called Secure Act 2.0 by a vote of 414 to 5—it now heads for the Senate. The bill follows in the footsteps of the 2019 Secure Act which passed unanimously.
The new package builds off the 2019 act in an effort to improve the U.S. retirement system. Companies that create new retirement plans would be mandated to automatically enroll employees, student loan borrowers could get a little help and older Americans would get the chance to save more in catch-up contributions.
Here’s what you need to know about the Secure Act 2.0.
What the Secure Act 2.0 Could Accomplish
In a nutshell, the original SECURE Act from 2019 has made it easier to save in a traditional IRA if you’re still working and choose to delay retirement. You’re no longer shut out from contributing to a 401(k) plan to enjoy tax benefits while saving from retirement simply because you work on a part-time basis. And it’s also easier to withdraw money from retirement accounts when funds are used for purposes allowed under the SECURE Act.
So, what will the SECURE Act 2.0 do and what could it mean for your retirement?
The Secure Act 2.0 is trying to accomplish three goals: Get people to save more, improve the retirement rules and lower costs for employers to set up retirement plans. One of the bill’s most popular provisions is allowing employers to offer matching retirement contributions to employees who are paying off student loans.
The bill will allow employees to earn employer matching contributions by making eligible student loan payments instead of making their own contributions to the company’s retirement plan.
Many Americans can’t afford to adequately save because they need to make student loan payments each month (averaging around $400)—and while the Biden administration will likely extend its freeze on student loan payments until the end of August this year, that may be the end if the pandemic indeed pauses, too.
This move could help the 26% of people who are not saving for retirement but want to, according to a 2019 TIAA–MIT AgeLab study. Now these borrowers can service their loans and earn whatever matching contribution—typically 3%—their employer makes to their plans.
Changes to Retirement Planning
The Secure Act 2.0 would also impact retirement plans for individuals, as it would increase the minimum age for required distributions and increase the retirement plan distribution limit. Here are the three key areas that will affect your retirement planning.
- Changes to Catch Up Contributions and 401(k)s:
Raising the catch-up limit for older workers is likely to mostly benefit highly compensated employees who can afford to contribute beyond the present maximum. Starting in 2023, SECURE Act 2.0 provides that all catch-up contributions to employer-sponsored plans must be made to Roth accounts, allowing the government to tax these dollars sooner.
Currently, the catch-up amount for individual retirement account (IRA) contributions is $1,000 for individuals who have reached age 50. SECURE Act 2.0 indexes this limit to inflation starting in 2023. The measure also raises the catch-up limit for SIMPLE plans to $5,000 from $3,000, indexed for inflation.
Starting in 2023, under SECURE Act 2.0, plan sponsors would have the option of permitting employees to elect that some or all of their matching contributions be treated as Roth contributions for 401(k) plans. The bill will ease limitations on older Americans.
For example, it increases the limits on 401(k) catch-up contributions for those between 62 and 64 to $10,000 from $6,500 presently, and those savings are considered Roth contributions. That means savers would pay taxes now, but would enjoy tax-free capital gains later.
- Changes to 403(b)s:
403 (b)s are retirement plans used by employees of charities and public education organizations. Currently, 403 (b) investments are limited to annuity contracts and mutual funds. The proposed legislation would:
- Expand allowed investments to include collective investment trusts.
- 403 (b) plans could participate in MEPs (Multiple Employer Plans).
3. Changes to Individual Retirement Plans:
The allowed amount for catch-up payments would be increased. Currently, individuals who are 62, 63 and 64 can contribute up to $6,500 annually to a retirement plan. That limit would be increased to $10,000.
Simple Employee Pension plans (SEPS) and Simple IRAs could be designated as Roth IRAs. If so designated, contributions would NOT be excludable from income at tax time.
Currently, the age when an individual must begin makes distributions from retirement accounts is 72. In 2022, that would be changed to 73. In 2029 the age would increase to 74 and in 2032 it would increase to 75.
The Secure Act 2.0 will benefit the current state of the retirement system, however, it doesn’t secure Social Security, the most important source of retirement income for most Americans. The best thing about the bill is that it shows that nearly all of Congress, whose members can’t agree on much at all, believes that Americans need more help when it comes to saving for retirement.
Are there some good ideas on the table to bolster retirement savings? Yes. Can much more be done? Yes. One of the main benefits the Secure Act 2.0 can do for us is create a more stable retirement future for us and our families.
As Fiduciaries, our advisors work to help protect you against many of the retirement risks you may face as you get older. We’ll help you look at the money you’ve saved and create a way to distribute and/or invest it so that you have the most money to live on year by year while paying the lowest amount of taxes possible.
Our goal is to ensure you never run out of money, no matter how long you live.
If you have further questions on the SECURE Act 2.0, or want more information on our retirement planning services, contact us here today.
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