SECURE Act 2.0: 5 Ways the Proposal Can Impact Your Retirement Savings

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SECURE Act 2.0: 5 Ways the Proposal Can Impact Your Retirement Savings

How could SECURE Act 2.0 affect your long-term wealth? From raising the age for required minimum distributions to more ways to save in a Roth, here are five possible improvements you should be aware of.

Published by Motley Fool Wealth ManagementTue, May 10, 2022

read time 7 min read

In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed into law to help improve retirement savings for American workers. Recently the House of Representatives passed the Securing a Strong Retirement Act (known as SECURE Act 2.0), which expands provisions of the first Act. It is now headed to the Senate for approval.

“There’s a retirement crisis in the United States that began long before the pandemic upended our economy. Millions of Americans are on course either to lack the financial ability to retire or to experience a significant drop in income when they are no longer able to work,” said House Ways and Means Committee Chairman Richard Neal, D-Mass. “In fact, roughly half of working-age U.S. households are at risk of being unable to maintain their pre-retirement standard of living in retirement, and 31 percent of workers have no retirement savings at all.”1

Per Congressman Neal, the first act “gave 4 million more Americans the opportunity to save for retirement through their employers…”1 With the SECURE Act 2.0, he estimates that 600,000 to 700,000 new retirement accounts will be formed.1 The goal of this proposal is to help more Americans successfully save for retirement by expanding coverage and increasing retirement savings. Here are just a few key highlights of the proposal and what it could mean for you if it is passed and made into law!2

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Increase in age for required minimum distributions (RMDs)

Another highlight of the SECURE Act is the increase in age for required minimum distributions. RMDs were instituted to ensure that individuals spent their retirement savings during their lifetime as opposed to saving them for estate planning purposes and transferring them to their beneficiaries.

The original SECURE Act raised the minimum age from 70 ½ to 72 in 2019. Under the 2.0 proposal, the age is increased gradually over the next decade to 73 starting on January 1, 2023, 74 in 2030, and 75 starting in 2033. The increase in age would allow Americans to save for retirement longer.

Increase in catch-up contribution limit

The proposal increases the amount that workers can save if they are over the age of 50. Under current law, those over 50 are permitted to make catch-up contributions of up to $6,500 to a 401K) and 403(b) after hitting the max limit if $20,500. For a SIMPLE IRA, the current max is $14,000 and the catch-up limit is $3,000.

The proposal increases the catch-up amount for workers who are ages 62-64. The proposed catch-up for a 401(k) and 403(b) would rise to $10,000 and for a SIMPLE IRA, $5,000. These limits would then be indexed for inflation every year. The proposal would also allow catch-up limits for IRA owners over 50 to be indexed to inflation. Since 2006, the current limit has been $1,000.

More Roth contributions

Currently, all retirement accounts, except for SIMPLE and SEP IRAs, allow Roth contributions. The proposal would allow SIMPLE IRAs and SEP IRAs to accept Roth contributions. Another provision in the bill would allow all catch-up contributions to a qualified retirement plan to be treated as Roth contributions. In other words, any catch-up contributions by workers over age 50 would be post-tax salary instead of pre-tax.

Why would some workers do this? Although they would get fewer tax savings up front for those who max out their retirement accounts, they would have an option of having the employer matching contributions put into a Roth 401(k), 403(b), or 475(b) account. Under the current law, matching contributions are required to be on a pre-tax basis. And then they could take advantage of the tax-free earnings growth that a Roth offers, without the requirement of RMDs. (Want to learn more about Roth IRAs? Click here.)

Automatic enrollment in 401(k) and 403(b) retirement plans

One of the biggest changes is the automatic enrollment of employees into their employer’s 401(k) and 403(b) retirement plans. A reason some Americans have little or no savings by the time they reach retirement age is that many who have access to an employer-sponsored plan do not participate. The goal of automatic enrollment is to help increase participation for eligible employees. Another reason Americans are not prepared for retirement is that they don’t have access to a retirement plan. So this proposal makes part-time employees who work at least 500 hours a year for two years eligible for a 401(k). The previous version set the minimum at three years.

The initial automatic enrollment amount starts at a rate of 3% of salary. The rate increases each year until an employee is contributing 10% of their pay. Employees can opt-out or select a different contribution amount. Small businesses with less than 10 employees or have been in business for less than three years old would be excluded. Businesses that have a 401(k) or 403(b) already in place are also exempt. Still not convinced that contributing to a retirement plan is worth it? The proposal allows employers to give additional incentives for contributing to a plan. While not currently allowed, under the new bill employers can offer small gift cards to boost employee participation.

Employer matching contributions for student loan payments

There are many employees who are unable to contribute to a retirement plan because of their overwhelming student loan debt. This proposal would allow employees who are making student loan payments but not contributing to their 401(k) account to receive matching contributions from their employer into their retirement account.

In other words, employers can make contributions to an employee’s retirement account based on the student loan payments that an employee makes. The amount is based on the employee’s salary and matching percentage. This would allow employees to continue paying down their student loans while giving them an opportunity to invest for their retirement. This applies to 401(k)s, 403(b)s, 457(b)s, and SIMPLE IRAs.

Another step in the right direction

The retirement savings crisis is front and center. And this proposed bill is aimed at further improving America’s long-term financial wellbeing, so it has wide bipartisan support and is expected to pass the Senate. There may be some small tweaks made, but the core of what we discussed should remain largely intact if it is passed. How can you navigate and benefit from these changes should it pass? Working with a financial planner can help ensure that you are on the right path to SECURing your future.

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Footnotes

1waysandmeans.house.gov, Apr. 1, 2022

2waysandmeans.house.gov, accessed Apr. 25, 2022

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