With significant bi-partisan support in both houses of Congress, the bills collectively known as SECURE Act 2.0 are very likely to pass in some version in the coming months. While the bill that already passed the House is over 146 pages long, there are some highlights we are keeping tabs on that directly affect the financial plans of our clients. Some of these were discussed in our last quarterly newsletter, but I thought I would summarize them here. Please remember this is not the law, YET!. We will reach out when we believe there is a specific impact to your plan.
Changes to RMDs
Let’s begin with RMDs, because they basically impact all non-Roth IRA retirement account owners. RMDs gradually get pushed back from age 72 (current) to age 75.
RMDs would start at:
- 73 if you turn 72 from 2022-2027
- 74 if you turn 72 in 2028-2029
- 75 if you turn 72 in 2030 or later
Catch-up contributions
The bill will finally index IRA catch-up contributions for inflation. Presently, the IRA contribution, plan salary deferral, plan catch-up contribution, and plan overall limits are all indexed for inflation…but not the IRA catch-up contribution limit. It has to be increased by legislation, and that’s only happened one time, in 2006!
The bill also creates new plan catch-up contribution limits in years a participant turns 62, 63 and 64. Such (62- to 64-year-old) participants would have following catch-up contribution limits beginning in 2023:
- 401(k)s and similar plans: $10k ($6.5k today)
- SIMPLE: $5k ($3k today)
Additional contributions seem like a good idea for participants still working in their 60s, but it is unclear to me, why Congress would choose to remove these after age 64.
Lastly, as it relates to catch-up contributions, the bill would require ALL catch-up contributions to be made to Roth
accounts! This means that if you are over age 50 and making use of the additional $6500/year retirement plan contribution, this will now be required to be invested in a Roth portion of the plan. You would not receive a current reduction of your income for tax purposes, but those funds would earn tax-free growth going forward.
SEP and SIMPLE Roth accounts
In another “pay-for” provision, the bill would create SEP and SIMPLE Roth accounts, and allow individuals to designate employer matching contributions to the Roth side. It is likely that Roth SIMPLE IRA salary deferrals would work similarly to Roth 401k contributions.
As for SEP or matching contributions, there would need to be a mechanism to add them to the W-2 somehow.
QCD rules
The current form of the bill would index the $100k limit for Qualified Charitable Distributions for inflation. QCDs can be a good way to direct part of your Required Minimum Distribution to charity and avoid the income landing on your tax return.
Qualified student loan payments
The bill would codify into law the ability for employers to be able to make “matching contributions” to a 401(k), 403(b) or SIMPLE IRA to the extent the participant made what would technically be known as a “Qualified Student Loan Payment.” This could be a great way for younger people in the work force to begin to have some retirement savings as they pay down student debt.
This list is clearly not exhaustive and could change as this bill evolves in the Senate. We will work to keep you up to date on possible impacts to your finances as this progresses.