If passed, the ‘Secure Act 2.0’ would significantly alter the retirement landscape. Officially called the Securing a Strong Retirement Act of 2021, the bill is essentially a follow up to the 2019 Secure Act. After approval from the Ways and Means Committee yesterday, the proposed legislation is now going to the House. If voted into law, here are four ways the Secure Act 2.0 could affect you.
1. Increase the required minimum distribution age
The Secure Act 2.0 would, for the second time since 2019, increase the RMD age. In the original Secure Act, retirees could begin delaying RMDs from age 70 1/2 to 72. In the new bill, the age when retirees must begin drawing from tax-deferred retirement accounts would increase to 73 in 2022, 74 in 2029, and age 75 in 2032.
2. Raise the catch-up contribution limits
Another way the Act aims to help Americans save for retirement is by increasing the catch-up contribution limit for older workers.
Under current law, at age 50:
- 401(k) and 403(b) plans: participants may save an additional $6,500 per year
- SIMPLE plans: participants may contribute an additional $3,000 per year
- IRAs: the catch-up contribution limit is $1,000
The IRS periodically increases the catch-up contribution amounts but none are indexed to inflation.
The Secure Act 2.0 would keep the age 50 catch-ups and allow new ones starting in 2023:
- 401(k) and 403(b) plans: an additional $10,000 per year at age 62, 63, and 64
- SIMPLE plans: an additional $5,000 per year at age 62, 63, and 64
- IRAs: no change to the $1,000 catch-up limit, though it would index the amount by inflation
The new limits on catch-up contributions would be indexed to inflation beginning in 2023.
3. Allow companies to make 401(k) matching contributions based on student loan payments
The Secure Act 2.0 would permit employers to make matching contributions to an employee’s retirement plan, even if the worker isn’t saving themselves. In the bill, workers facing the decision to pay off student loans or save for retirement could have a portion of their student loan payments matched by their employer and contributed to their retirement plan.
Keep in mind, matching contributions are often voluntary so it would be up to the plan as to whether to adopt this provision, should it become law. Especially for smaller employers, recordkeeping could become burdensome.
4. Expanding use of after-tax contributions to Roth accounts
Under current law, SEP and SIMPLE retirement plans cannot have a designated Roth IRA account. In the Secure Act 2.0, participants of these plans could have the option to make after-tax Roth contributions within the plan.
The bill would also require participants to make catch-up contributions to a Roth account in 401(a), 403(b), and 457(b) plans. Further, under these plans, employers may allow employees to elect matching contributions in a Roth account versus pre-tax.
Planning for change
While the changes above are perhaps the most significant, there are many other provisions in Secure Act 2.0. Only the newest version of the bill, it’s important to remember that nothing has been signed into law. As proposals move through the legislative process, they are almost always modified. And many never end up becoming law at all.
Should the Secure Act 2.0 eventually pass, consider how the changes may impact you and what planning opportunities exist. Just because you have more flexibility, doesn’t mean it makes sense to use it. For example, the RMD age is now 72, but it doesn’t mean all retirees should delay drawing from retirement accounts. Expanded use of Roth accounts may offer new options, but high earners should think twice before participating – particularly in light of proposed tax increases.