This fall, a bipartisan bill known as the Securing a Strong Retirement Act of 2020 was introduced in the House of Representatives. If passed, the bill would make major changes to the most popular retirement accounts, including individual retirement accounts (IRAs), 401(k)s, and 403(b)s. The bill calls for significantly expanding the Saver’s Credit, a tax credit designed to encourage people to save for retirement and to expand automatic enrollment. In addition, the bill would increase the age at which required minimum distributions (RMDs) from these accounts begin and would make it possible to save more in catch-up contributions. The overall effect would make it easier for millions of people to save for retirement in a way that would allow them to maintain an acceptable lifestyle.
The new bill was introduced by Ways and Means Committee Chairman Richard Neal and Ranking Member Kevin Brady. The proposal is already nicknamed the Secure Act 2, as it builds upon the Secure Act that was passed into law in 2019. The following are some of the key changes that the legislation proposes:
Increased Catch-Up Limits
The new bill would increase the limits on catch-up contributions to both 401(k) and IRA accounts. Catch-up contributions include increases in the amount that people can dedicate to these accounts once they turn 50. Currently, people can save an additional $1,000 per year in an IRA and $6,500 in a 401(k). The new law would change IRA catch-up contributions by indexing them to inflation starting in 2022. The catch-up amount is not currently indexed to inflation, so it does not change over time. For 401(k)s, people who are 60 or older would be able to save $10,000 per year. SIMPLE plans are an exception to this rule. The current limit on catch-up savings is $3,000, and this amount would be increased to $5,000.
Expansion in Automatic Enrollment
Since 1998, employers have been able to automatically enroll employees in retirement plans provided that they have the option to opt out of them. The policy significantly expanded employee participation, especially among those employees who earn lower wages. The Secure Act 2 would require employers to enroll their employees in SIMPLE, 401(k), or 403(b) plans once they become eligible, with an initial contribution of at least 3 percent. Then, the amount must be increased by 1 percent each year until it reaches the maximum limit, which is 10 percent.
Student Loan Matching Contributions
Employers often offer matching contributions to their employees’ retirement plans. While the rules can vary quite a bit, the general approach is to match a certain percentage of an employee’s own contributions to a retirement plan. Many younger workers struggle to save much for retirement because they need to repay their student loans. The cost of these loans may prevent them from taking full advantage of a match program. The new law would allow employers to make matching contributions to 401(k), 403(b), and SIMPLE IRA retirement plans for qualified student loan payments. As a result, employees would be able to pay down their student loans and eliminate debt.
RMDs Would Start at a Later Age
The Secure Act increased the age at which RMDs start from 70.5 to 72. The new law proposes to push this date even later with RMDs starting at 75. Furthermore, the RMD would be waived for people with less than $100,000 in their retirements plans and IRAs at the end of the calendar year before they turn 75. The new rule would help people who are catching up on their retirement savings later in life and would allow those who plan to work later to continue saving without the need to start withdrawals.
Expanded Saver’s Credit
A tax credit is a reduction in a person’s tax obligations. For this reason, it is valuable as a motivator for people to save. Currently, the credit is up to $1,000 based on income. Under the new law, the rate structure would be simplified to take the guesswork out of the credit amount prior to filing your taxes, and the total amount would be increased to $1,500 per person, with additional increases in the maximum income needed to qualify for the credit.
Other Changes that Would Occur under the Legislation
While the changes outlined are the major ones associated with Secure Act 2, other minor modifications have also been included in the legislation. For example, new tax credits are proposed for employers who allow military spouses to become eligible to participate in retirement plans. Also, employers would gain the ability to provide small financial incentives for participation in retirement plans. The legislation would also remove some of the limitations on qualified longevity annuity contracts and facilitate the creation of a centralized online registry for retirement accounts from previous employers. Small businesses would receive additional assistance in setting up pension plans. In addition, some of the barriers to setting up 403(b) plans for small businesses would be eliminated.