SJ

Securing A Strong Retirement Act Of 2022

A few weeks ago, the House overwhelmingly passed the Securing a Strong Retirement Act of 2022, or SECURE Act 2.0.
It seems likely that the Senate will pass their version of SECURE Act 2.0 as well.
Given its strong support and probability of passing in a similar form, I thought you might be interested in hearing what’s inside.
Instead of summarizing all 142 pages, I’m sharing the 7 provisions that may impact retirement savers the most.

1.) The Age for Required Minimum Distributions (RMD) Would Change Again

The original SECURE Act from 2019 increased the RMD age from 70½ to 72.
This bill (Secure Act 2.0) would increase the age again, ultimately to age 75.
However, this increase will happen in phases.
As the bill stands, the RMD age would move to age 73 in 2023, then increase to age 74 in 2030, and finally rise to age 75 in 2033.

2.) RMD Penalties to Be Reduced

The steepest penalty that the IRS levies is for missed RMDs which currently stands at 50%.
Under SECURE Act 2.0, the penalty would be reduced to 25%. If the mistake is corrected in a “timely manner,” it will be reduced further to 10%.
Given that they are making RMD ages more complicated, it seems reasonable to reduce the penalty.

3.) Catch-Up Contributions Increasing

Under current law, employees 50 and older who participate in their 401(k) or 403(b) plan can contribute an additional $6,500 beyond the standard $20,500.
This will remain the case except for workers ages 62 through 64.
For those investors, the catch-up amount would increase to $10,000 starting in 2024.
SIMPLE IRA catch-up contributions will increase from $3,000 to $5,000 during the same three-year age band, also starting in 2024.
Each of the catch-up provisions noted above will continue to be indexed to inflation. Additionally, for the first time, IRA catch-up contributions (currently $1,000 per person) will also be indexed for inflation.
But there is a significant change that would impact the taxability of employer plan catch-up contributions…

4.) Catch-Up Contributions Will be Subject to Roth Treatment

Here’s the big change. All employer-plan catch-up contributions will be subject to Roth treatment.
In other words, the extra contribution amounts won’t offer the tax savings we’re accustomed to because the contributions will come from after-tax pay.
This provision is one way Congress is seeking to raise revenue to help offset the cost of this bill.

5.) Employer Matching Contributions Can Be Roth Contributions

Under current law, all employer matching contributions must be pre-tax regardless of the funding choice of the employee.
If this bill passes, participants may be given the choice to receive their matching contributions on a Roth basis starting in 2023.
If the employee chooses to do so, it will result in additional taxable income for the employee.

6.) SIMPLE & SEP Roth IRAs

At current, all plans that accept pre-tax employee contributions can accept Roth contributions except for SIMPLE and SEP IRAs.
This exclusion will be removed with SECURE Act 2.0, which is good news for many small business owners and their employees.

7.) The Creation of a “Retirement Savings Lost & Found”

There are many times where I’ve seen people “find” old 401(k) plans, but this often requires quite a bit of effort.
Under this law, the Department of Labor will create a new online database to help investors find old plans.
The database is supposed to be set up within two years after enactment.

While the bill addresses many other retirement issues, these are the major items.
As I said initially, this is not yet law.
If and when it goes into effect, I’ll be sharing how to address the changes from a retirement & tax planning perspective.
To a successful retirement.