Secure Act 2.0: What it could mean for retirement savings
In 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed how you can save and withdraw money from your retirement accounts, the first major legislative change to retirement rules in over a decade. And now more legislation affecting retirement and savings laws is on the horizon.
On March 29 the House of Representatives passed the Securing a Strong Retirement Act, H.R. 2954, also referred to as the Secure Act 2.0, with a bipartisan vote of 414-5. The bill will improve the retirement savings system for U.S. workers, moving it closer to becoming law.
“H.R. 2954 will help all Americans successfully save for a secure retirement by expanding coverage and increasing retirement savings, simplifying the current retirement system, and protecting Americans and their retirement accounts,” said House Ways and Means Committee Chairman Richard Neal, D-Mass., ahead of the Tuesday vote. “Too many workers reach retirement age without having the savings they need.”
This subject gets so much attention from policymakers because most people in the U.S. are not prepared for their retirement years. In fact, according to one study, the difference between what people should have saved and what they actually have saved is projected to be a whopping $137 trillion. If that’s the case, retired individuals could outlive their savings by up to 20 years!
Understanding current laws and how they may change can help you prepare your retirement savings strategy for the future. The Secure Act 2.0 has several provisions that would benefit retirement savers and employers. Here’s a brief look at the highlights of the bill:
Extended Required Minimum Distribution (RMD) Date
A proposal in one package would gradually increase the starting age for RMDs from the current 72 to 73 in 2022, 74 in 2029, and 75 by 2032. In addition to providing a tax impact for individuals, extending RMD dates gives individuals more power to determine when and how to withdraw their tax-deferred savings.
An increase in catch-up contributions
The plan would also make changes to how much individuals can contribute as they near retirement in the form of catch-up contributions. These contributions allow people who are 50 and older to put aside additional dollars into retirement plans such as 401(k)s and IRAs. Individuals aged 62-64 could make catch-up contributions of up to $10,000, an increase from $6,500. This would not only reduce a saver’s current taxable income but also allow them to boost their retirement savings by putting their money to work in a tax-advantaged savings plan.
Retirement plan contributions for people with student loans
Younger workers who are paying off student loan debt often choose to pay off student loans instead of contributing to a retirement plan. The proposed legislation would allow employers to match student loan payments as contributions to retirement. Not only would this be an effective way for younger workers to jumpstart their retirement savings plan but it’s an excellent opportunity for companies to attract and retain employees.
Auto-enrollment in 401(k) plans
New proposals would require employers to automatically enroll eligible employees in retirement plans at a rate of 3% of their salary, which would increase annually until their contribution hits 10% of their pay. However, employees would have the ability to opt-out or change the amount of their contribution
Penalty-free withdrawals for expenses related to the birth or adoption of a child
Typically, retirement plan distributions must be included in income and are subject to an early withdrawal penalty if withdrawn before a certain age. The proposed plan would make plan distributions penalty-free if used to pay for expenses up to $5,000 related to the birth or adoption of a child. For married couples, this means $5,000 for each spouse for a qualified birth or adoption.
In addition to these features, the Secure Act 2.0 would make other changes for survivors of domestic abuse, small business owners, and low-wage workers eligible for certain tax credits. It would also create a national database for Americans to reclaim lost retirement accounts.
Now that it’s passed the House, the legislation will be sent to the Senate for possible action in April. Additionally, there are other bills in Congress that, if passed, would make similar improvements to retirement savings.
As you consider new opportunities to boost your retirement savings, take the time to assess your current position. A financial professional can help you review your current strategy and discuss whether any changes are appropriate for you. You can also plan for any potential changes should new legislation be enacted.