SECURE Act 2.0: 10 Ways the Proposed Law Could Change Retirement Savings
If passed, the Securing a Strong Retirement Act would automatically enroll some workers in retirement plans and raise the mandatory age for RMDs.
Americans saw a number of changes to their retirement savings plans when the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, was passed two years ago. Get ready for more.
The House Ways and Means Committee recently approved a second bill, the Securing a Strong Retirement Act of 2021, that would continue to tweak the rules for contributing to and withdrawing from retirement savings vehicles.
Nicknamed the SECURE Act 2.0, the legislation was introduced by Reps. Richard Neal, D-Mass., and Kevin Brady, R-Texas, and aims to encourage Americans to save more for retirement, in part by making that process easier. It’s widely expected the bill will pass either this year or in 2022, given its strong bipartisan support and the nearly unanimous backing of the original SECURE Act.
Here’s a look at 10 ways your retirement savings plan may change if the legislation becomes law.
You Can Wait Longer to Take RMDs
The original SECURE Act raised the age at which you must start taking required minimum distributions from traditional IRAs and 401(k)s from age 70 1/2 to 72. The proposed legislation would again raise the age to begin taking RMDs, this time to age 75 over a decade. That means you could have more time for your money to grow tax free but if you delay RMDs, your withdrawals may need to be larger.
The age for RMDs would initially increase to 73 starting on Jan. 1, 2022, then to age 74 on Jan. 1, 2029. It would rise to 75 on Jan. 1, 2032.
Additionally, the penalty for failing to make a mandatory withdrawal would be greatly reduced. Currently, if you fail to take your full RMD, the shortfall is hit with a 50% tax, one of the harshest penalties you can face from Uncle Sam. Under the proposal, this would be reduced to 25%. If the mistake is corrected in a timely manner, the tax would be further reduced to 10%.
Your Employer Could Auto-Enroll You in a Retirement Savings Plan
The legislation would require employers to automatically enroll eligible workers into 401(k) or 403(b) plans at a savings rate of 3% of their salary -- although workers can opt out or opt to save less or even more, up to annual contribution limits. Enrolled workers’ contribution rates would automatically increase each year by 1% until their contribution reaches 10%.
“[A]utomatic enrollment in 401(k) plans – providing for people to participate in the plan unless they take the initiative to opt out – significantly increases participation,” according to a summary from the House Ways and Means Committee about the proposed legislation.
Businesses with fewer than 10 employees, businesses which opened fewer than three years ago and retirement plans for churches and government agencies would be exempt.
You Might Earn Extra Incentives for Contributing to a Retirement Account
Employers are currently prohibited from providing financial incentives -- aside from matching funds -- to encourage their workers to contribute to a 401(k) account. The proposed legislation would change that by allowing employers to provide, say, small gift cards, as an additional lure to get employees saving for retirement.
You Can Make Bigger Catch-Up Contributions
Currently, workers who are at least 50 years old can make catch-up contributions to their retirement accounts. For 2021, older workers can contribute an extra $6,500 to 401(k) and 403(b) plans after hitting this year’s $19,500 limit. For a SIMPLE IRA, they can add $3,000.
Under the proposed bill, workers between the ages of 62 and 64 would be able to contribute even more to these accounts. For 401(k) and 403(b) plans, these employees would be able to contribute an extra $10,000 (up from the current $6,500), while participants in a SIMPLE IRA could contribute an additional $5,000 (up from the current $3,000).
The proposal also calls for IRA catch-up limits for those who are 50 years old to be indexed to inflation starting in 2023. Since 2006, the annual increase in catch-up contribution amounts has been limited to $1,000.
You Can Earn Employer Matching Funds… on Your Student-Loan Payoffs
Traditionally, employers match participants’ contributions to their retirement accounts. But some workers may be unable to fund their retirement account as they prioritize paying down student loans. The proposed legislation would allow employers to make matching contributions to workers’ retirement accounts based on workers’ own student loan payments. This would apply to 401(k) plans, 403(b) plans, SIMPLE IRAs and 457(b) plans.
You Could Find Old 401(k)s More Easily
It can be challenging for employers to locate former workers, who 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, the legislation would create a national online lost-and-found database for retirement plans.
You Can Contribute to Roths in More Ways
Currently, SIMPLE and SEP IRAs are not allowed to accept Roth contributions from employees. The proposed legislation would change that. (Other retirement plans, including 401(k)s, 403(b)s and 457(b)s, can already accept Roth contributions.)
Additionally, employees could opt for employer matching contributions to 401(k), 457(b) and 403(b) plans to be made on a Roth basis. Currently, matching contributions must be on a pre-tax basis.
Part-Time Workers Would Have a Shorter Path to Retirement-Plan Eligibility
Under the first SECURE Act, companies that offer a 401(k) plan are now required to allow employees who work at least 500 hours a year for three consecutive years to contribute to a retirement account. This proposal would reduce the three-year rule to two.
Savers in 403(b) Plans Would Get Better Investment Options
Currently, 403(b) plans can generally only invest in annuity contracts and mutual funds, preventing participants from investing in collective investment trusts. A collective investment trust is a group of pooled accounts. This lowers fees by achieving economies of scale.
The proposal would allow 403(b) custodial accounts to invest in collective investment trusts, if certain conditions are met, including the plan is subject to the Employee Retirement Income Security Act of 1974, or ERISA, and the sponsor accepts fiduciary responsibility for selecting the investments participants can choose from.
Workers at Small Businesses Would Be More Likely to Get Access to a Retirement Plan
Within the new bill, there are several tax credits that small businesses could claim for providing greater access to retirement plans for workers. For instance, employers with up to 50 workers would be able to offset more plan start-up costs.
The law would also allow small businesses to claim a tax credit for joining a multi-employer plan, no matter how long that plan has existed, for three years. (Currently, small businesses can only claim this credit if the plan has been around for less than three years.)
And another credit should help military spouses, who often don’t stay in one area long enough to qualify for the full benefits of a retirement plan. Small businesses would be eligible for a tax credit for their defined contribution plans if they allow spouses of those serving in the military to participate in the plan within two months of joining the company.