Secure Act 2.0 and your retirement

Last December, a new bill called the “Setting Every Community Up for Retirement Enhancement” (SECURE) act was passed by congress and initiated sweeping new changes to the retirement system in the United States. The act was filled with many improvements to IRA’s, retirement plans, small businesses, and college savings plans. For most people, the notable improvements included increasing the age of Required Minimum Distributions (RMD’s) to 72 from 70.5, allowing IRA contributions after 70.5, and creating the “10-year rule” for inherited accounts. There were many other minor updates that impact some people, but not others, depending on their financial situation.

Even during times of extreme polarization, improving retirement planning and updates seems to be a bipartisan issue in congress. The SECURE act passed with bipartisan support, and these changes were quickly implemented without much disagreement. It might seem preferable to let the dust settle for awhile before implementing even more changes, but there is already new legislation in the works from two members of Congress (Democrat Richard Neal and Republican Representative Kevin Brady). This new legislation is called “Securing a Strong Retirement Act of 2020” (aka SECURE act 2.0), and it has already received broad support, with many believing it is likely to become law this year. If passed, the act will include more than 30 changes that allow Americans to save sooner, expand the use of retirement plans, provide tax benefits, and simplify the process.

Changes to Required Minimum Distributions (RMD’s)

• Reduces penalties for missing RMD’s.

• The starting age for required minimum distributions (RMDs) is raised from 72 to 75.

• RMDs no longer required for individuals with total retirement savings of $100,000 or less (as of the end of the year before they reach age 75).

• Increase from $135,000 to $200,000 the amount of savings that is exempt from the RMD requirement if used to purchase certain types of annuities.

Increased Tax Incentives for Saving in Retirement Plans

• Increases the “Savers tax credit” available to individuals for contributing to a retirement plan or IRA.

• Qualified Charitable Distributions (QCD) limit increased to $130,000, allow QCDs to be made from retirement plans and IRAs, and allows for one-time distributions to charities through charitable trusts and charitable gift annuities.

• Increases the tax credit for small businesses that have expenses for starting a retirement plan.

Simplifying and Increase Participation Employer Retirement Plans

• Student loan payments can be treated as 401(k), 403(b) or SIMPLE IRA plan salary deferrals, which makes them eligible for employer matching contributions.

• 401(k) plans would be required to automatically enroll employees upon eligibility and force annual automatic increases in deferral rates (with an “opt-out” option”).

• Reduces the three-year requirement for 401(k) participation of long-term, part-time employees to two years.

• Increases the “catch-up” limit for employees that are 60+ and still contributing to 401(k), 403(b), and SIMPLE IRA plans.

All these changes will have broad, positive impacts on Americans ability to save and delay paying taxes to the IRS during their retirement years. In particular, the ability to defer RMD’s to age 75 will be a large bonus to those that are forced to take RMD’s from accounts they are trying to grow. Many of the changes make it easier and automatic for people to save in their work-sponsored retirement plans, receive a significant tax break, and escape many of the limits and penalties that can impede progress. The act currently has bipartisan support and is expected to be part of proposed legislation this year, though it remains to be seen exactly how and when the vote will be put to congress.