Despite continued polarization in our nation’s capital, there’s at least one issue that appears to have strong bipartisanship support: bolstering our nation’s retirement savings.
Earlier this year, the U.S. House of Representatives overwhelmingly passed the Securing a Strong Retirement Act by a 414-5 vote. This bill, commonly known as SECURE 2.0, follows in the footsteps of the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was the first major retirement-related legislation in over a decade. While the original SECURE Act was comprehensive, lawmakers at the time indicated they were not finished, and there clearly appears to be strong support for additional reform.
In its current form, the SECURE 2.0 bill has over 40 provisions. Of course, these are all subject to change as the bill moves through the legislative process. The Senate is expected to craft its own version, which will then need to be reconciled with the House’s bill. As of this writing, Senate committees with jurisdiction over retirement-related provisions have approved proposals that may form the basis of that chamber’s version of SECURE 2.0.
To give you a preliminary sense of what may be in store, here are some key current provisions of the House’s bill that would impact those near or in retirement.
- New required beginning dates for required minimum distributions (RMDs): The original SECURE Act increased the age at which one has to start making withdrawals from a tax-deferred retirement account to 72 (it was previously 70½). SECURE 2.0 increases this yet again, but in a staggered fashion: first to those who turn 73 by 2022, then to those who turn 74 by 2030, and finally to those who turn 75 by 2032. Given that these withdrawals are typically taxable to the recipient, the extension would afford the opportunity for additional tax-deferred compounding.
- Reduction in RMD penalties: As it currently stands, if you fail to take your full RMD, the shortfall is hit with a 50% excise tax—a rather harsh penalty. This tax would be reduced to 25% under SECURE 2.0.Furthermore, if the mistake is corrected in a timely manner, the penalty would be further reduced to 10%
- Higher “catch-up” contribution limits: A catch-up contribution is a type of retirement savings contribution that allows people aged 50 or older to make additional contributions to 401(k) accounts and individual retirement accounts (IRAs). SECURE 2.0 would allow those between age 62 and 64 to contribute an additional $10,000 (indexed to inflation) into their 401(k) and 403(b) accounts and $5,000 into SIMPLE IRA plans; currently these amounts are limited to $6,500 and $3,000, respectively. Additionally, starting in 2022, these catch-up contributions would be taxed as Roth contributions, meaning they would be subject to income tax up front and then allowed to compound tax-free thereafter. Finally, the bill also indexes the IRA catch-up contribution limit (currently $1,000) to inflation.
- Enhancements to qualified charitable distributions (QCDs): Some individuals use qualified charitable distributions (QCDs) to satisfy both their RMD requirements and their philanthropic giving. With a QCD, one can distribute up to $100,000 per year directly to a qualified 501(c)(3) charity after age 70½. This distribution cannot be claimed as a charitable deduction, but it is excluded from taxable income.
SECURE 2.0 would enhance this provision. It would annually index the $100,000 limit to keep pace with inflation and also would permit one-time QCD transfers of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). Both provisions would take effect in the taxable year following enactment of the law.
- Faster 401(k) eligibility for part-time employees: The original SECURE Act generally requires employers to allow part-time employees who work at least 500 hours for three consecutive years to participate in their 401(k) plans. Under SECURE 2.0, part-time employees would need to work at least 500 hours for only two consecutive years to be eligible for their employer’s 401(k) plan. The provision would be effective for plan years beginning after 2022.
- Added flexibility to SEP and SIMPLE IRAs: Small businesses and those who are self-employed often take advantage of SIMPLE and SEP retirement accounts, which have contribution ceilings that are far higher than those of other retirement vehicles. The new bill would allow SIMPLE and SEP IRAs to accept Roth contributions.
- Increased annuity/QLAC contributions: The bill would increase to $200,000 the amount that can be used, without taking a taxable distribution, to purchase a qualified longevity annuity contract (QLAC). The current limit is 25% of the account up to a maximum of $135,000. A QLAC is an investment vehicle that can defer the taxes associated with taking RMDs by converting funds from a retirement account to an annuity, or fixed income stream. The QLAC can defer income inside the IRA to age 85. Today, contributions to a QLAC are limited to the lesser of $135,000 or 25% of your qualified account balance. So if you had a $400,000 account, you could contribute only 25%, or $100,000, to a QLAC. SECURE 2.0 would remove that 25% cap and would set the maximum contribution at $200,000.
- “Lost & found” for 401(k) plans: It can be challenging for employers to locate former workers, who may have changed their name or address, to pay out benefits from a retirement plan. It can also be difficult for workers to locate a former employer if that company has rebranded or merged with another firm. To make this easier, SECURE 2.0 would require the Department of Labor to create a national online lost-and-found database for retirement plans.
Again, this is just a partial list, as SECURE 2.0 has far-reaching implications beyond those for retirees and near-retirees. And to reiterate, there is more work to be done on the bill. Assuming that the Senate marks up its own version and the respective packages are then reconciled between the two chambers, many pundits believe final legislation will not be up for vote until after the November midterm election at the earliest. That said, these developments are worth monitoring, and I will provide an update if and when a final bill is signed into law. In the meantime, if you have questions or concerns about how SECURE 2.0 might impact you individually, please feel free to contact me.
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