Four Methods The Safe Act 2.Zero Would Change Retirement Planning
If you are voted in law, there are four ways the Secure Act 2.0 can affect you.
If passed, the “Secure Act 2.0” would change the retirement landscape significantly. Officially known as the 2021 Strong Retirement Act, the bill is essentially a continuation of the 2019 Retirement Act. Following yesterday’s approval by the Ways and Means Committee, the proposed bill now goes to the House. When voted by law, here are four Ways The Secure Act 2.0 Could Affect You.
1. Increase the required minimum age of distribution
The Secure Act 2.0 would increase the RMD age for the second time since 2019. Under the original Secure Act, retirees could begin shifting RMDs from 70 1/2 to 72 years. The new bill would increase the age at which retirees are required to withdraw from tax-deferred retirement accounts to 20 in 2022, 74 in 2029, and 74 at age 75 in 2032.
2. Increase the catch-up contribution limits
Another way the law is supposed to help Americans save for retirement is by increasing the contribution cap for older workers.
According to current law at the age of 50:
- Plans 401 (k) and 403 (b): Participants can save an additional $ 6,500 per year
- SIMPLE plans: Participants can contribute an additional $ 3,000 per year
- IRAs: The catch-up fee limit is $ 1,000
The IRS regularly increases catch-up amounts, but none are tied to inflation.
The Secure Act 2.0 would keep the race to catch up at the age of 50 and enable new races to catch up from 2023:
- Plans 401 (k) and 403 (b): an additional $ 10,000 per year at ages 62, 63, and 64
- SIMPLE plans: an additional $ 5,000 per year at ages 62, 63, and 64
- IRAs: No change to the $ 1,000 catch-up limit, although that would index the amount after inflation
The new limit values for catch-up contributions would be linked to inflation from 2023.
3. Allow companies to make 401 (k) matching contributions based on student loan payments
The Secure Act 2.0 would enable employers to make equivalent contributions to an employee’s retirement savings even if the employee is not saving himself. In the bill, workers faced with a decision to repay student loans or save for retirement could have their employer match part of their student loan payments and contribute to their retirement plan.
Note that matching contributions are often voluntary, so if this provision becomes law, it is on track to see whether this provision will be adopted. Keeping records can become a burden, especially for smaller employers.
4. Extending the use of post-tax contributions to Roth accounts
Under current law, SEP and SIMPLE pension plans cannot have a designated Roth IRA account. In the Secure Act 2.0, participants in these plans could have the option of making Roth contributions after tax within the plan.
The bill would also require attendees to make catch-up contributions to a Roth account on plans 401 (a), 403 (b), and 457 (b). In addition, as part of these plans, employers can allow employees to choose appropriate contributions to a Roth account in relation to input tax.
Plan for changes
While the above changes are perhaps the most significant, there are many other provisions in Secure Act 2.0. Only the latest version of the bill, it is important to remember that nothing has been legally signed. When proposals go through the legislative process, they are almost always changed. And many never become law.
Should the Secure Act 2.0 ever be passed, consider how the changes could affect you and what planning options exist. Just because you have more flexibility doesn’t mean it makes sense to use them. For example, the RMD age is now 72, but that doesn’t mean all retirees should delay using retirement accounts. The expanded use of Roth accounts may offer new options, but high earners should think twice before participating – especially given the proposed tax hikes.