Last week, by a vote of 414-5, the U.S. House of Representatives approved a bipartisan bill that would make significant changes to retirement planning.
The Securing a Strong Retirement Act of 2021 (H.R. 2954) is a sequel to the SECURE Act of 2019 which also passed with strong bipartisan support. Its nickname is SECURE Act 2.0.
As you may recall, the 2019 SECURE Act made significant changes such as increasing the age at which Required Minimum Distributions (RMDs) must begin to age 72 and limiting the life of inherited retirement accounts to 10 years. The SECURE Act 2.0 also includes some impactful provisions that could alter your financial plan if these provisions are signed into law.
Please keep in mind that this bill still must pass the U.S. Senate and be signed into law by the President. It will likely change as it twists and turns through the legislative process, but with such a lopsided vote in the House it is highly likely that at least some of these provisions could be signed into law.
Here are some of the provisions that are included in the House version of SECURE Act 2.0 as of last week:
- Increase the age that Required Minimum Distributions (RMDs) must begin from retirement accounts. Currently RMDs begin in the year you turn 72. This bill would gradually increase that to age 73 in 2023, age 74 in 2030, and age 75 in 2033.
- Reduce the penalty for missing an RMD from 50% to 25% starting in 2023. If resolved in a timely manner, the penalty would be 10%.
- Raise the limit on retirement plan catch-up contributions for taxpayers age 62, 63, or 64 to $10,000 for 401(k) and 403(b) plan with a smaller increase for SIMPLE IRA plans starting in 2024.
- Index the $1,000 annual IRA catch up contribution limit for inflation starting in 2024.
- Simplify and increase eligibility for the Saver’s Credit starting in 2027. The Saver’s Credit provides a tax credit for retirement plan contributions.
- Require catch-up contributions for most retirement plans to be designated as Roth contributions starting in 2023.
- Permit retirement plans to offer employees the option to designate employer matching contributions as Roth contributions for most retirement plans starting in 2022.
- Allow employers to provide employees with a matching retirement plan contribution for making student loan payments starting in 2023.
- Require newly established 401(k) plans to automatically enroll eligible employees with a minimum 3% contribution, and then automatically increase their contribution by 1% per year until it reaches 10%. Employees may opt out of contributing. This would apply to new 401(k) plans starting in 2024.
- Permit employers to offer “small financial incentives” like low-dollar gift cards for enrolling in an employer retirement plan starting in 2022.
- Expand SEP IRA and SIMPLE IRA retirement plan to include Roth options for contributions in 2023.
- Create a new national online “lost and found” for retirement plans operated by the Department of Labor within 2 years.
- Permit a one-time $50,000 Qualified Charitable Distribution to a charitable remainder trust or similar split-interest entity starting in 2022.
- Allow penalty-free withdrawals from retirement accounts for victims of domestic abuse up to the lesser of $10,000 or 50% of their account value starting in 2022.
There are literally hundreds of other provisions included in SECURE 2.0. If you are curious, you will find a summary of the bill provided by the House Ways and Means Committee here.
We will continue to closely monitor any changes that Congress makes to your retirement accounts and update your financial plan as needed to potentially reduce your tax burden.
Quote of the week: Stan Van Gundy: “Coaches are going to adapt to whatever the rules are. The rules certainly change the strategy.”
Source: House Ways and Means Committee
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