The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed how you can save and withdraw money from your retirement accounts. It was also the first major legislative change to retirement rules in more than 10 years.
Now, more changes to laws that affect retirement saving could be coming. Several different pieces of legislation are currently under review in Congress, including two bipartisan bills referred to as the Secure Act 2.0.
One reason the subject receives so much attention from policymakers in Washington is the lack of preparedness for retirement. According to one study, by 2050, the retirement income gap in the U.S. (the difference between what savers should have in place and what they’ll actually have saved) is projected to be $137 trillion. If projections hold, retirees in six major economies (including the U.S.) would outlive their savings by an average of eight to 20 years.1 “These proposed changes are beneficial to empower individuals to reach savings goals and provide more flexibility upon retirement,” says Sarah Darr, head of financial planning and senior vice president at U.S. Bank Wealth Management.
Understanding current laws and how they may change can help you prepare your retirement savings strategy into the future.
The original SECURE Act now in effect
The 2019 legislation added some important new enhancements to existing rules about retirement saving, including:
- Raising the age of required minimum distributions (RMDs) from 70 ½ to 72. Delaying the RMD gives you more time to adjust to what your work and tax situation might be, retire a little bit later, and potentially be in a lower tax bracket when that taxable distribution is required.
- Eliminating an age limit for contributions to traditional IRAs. They can now occur at any age provided the individual has earned compensation.
- Removing the ability to “stretch out” distributions from an inherited IRA over a lifetime for non-spouse beneficiaries. In these circumstances, the entire value of the inherited IRA must be distributed within ten years of its receipt. (Those who inherited an IRA before the SECURE Act took effect are grandfathered in and may continue to stretch out their RMDs.)
- Allowing 529 college savings plan account holders to use funds in their plan to repay up to $10,000 per year in qualified student loan debt.
- Access to penalty-free withdrawals of up to $5,000 per year from a workplace savings plan (such as a 401(k)) to help offset the costs of having or adopting a child.
Key provisions of the SECURE Act 2.0 and other proposals
Different pieces of legislation, with some similarities and contrasts, are under consideration in the House and the Senate. Keeping in mind that at this point, the changes to laws that impact retirement savings are only in the proposal stage, here’s a brief look at what’s being discussed currently in Congress.
Updates to RMDs
A proposal in one package would allow RMDs to be delayed until age 73 beginning in 2022. Then, the required start date for distributions would shift to age 74 in 2029 and age 75 in 2032. There are variations on that timeline in other proposals. “Extending RMD dates to later ages is a way to put more power in the hands of individuals to determine when and how to withdraw their tax-deferred savings,” says Darr. “This can also have a tax impact for individuals.”
An increase in catch-up contributions
Catch-up contributions allow people age 50 and older to set aside additional dollars over the standard maximum contributions to workplace retirement plans (such as 401(k)s) and IRAs. Under one new proposal, another form of “catch-up contribution” would be created for those ages 62, 63 and 64. At that point, they would be allowed to add $10,000 to a 401(k) or 403(b) plan. For those enrolled in SIMPLE plans, the additional amount to be contributed at ages 62, 63 and 64 would be $5,000 per year (compared to $3,000 that is allowed today). A different proposal would apply the added $10,000 in catch-up contributions to 401(k) and 403(b) plans to begin at age 60.
“These proposed changes are beneficial to empower individuals to reach savings goals and provide more flexibility upon retirement.”
“The ability to put more income to work in a tax-advantaged retirement savings plan not only boosts retirement savings,” says Darr, “but also reduces current taxable income.” As a result, some individuals may be able to avoid moving into a higher tax bracket by deferring a larger chunk of their salary and taking advantage of expanded catch-up contributions.
Retirement plan contributions for those with student loan debts
Multiple bills under consideration include a provision that would allow employers to make contributions to workplace savings plans for employees who are still repaying student loans. It isn’t unusual for younger workers carrying student debt to forego retirement plan contributions in order to continue to pay off college loans. Under the proposed legislation, employers would be allowed to make contributions for employees faced with this dilemma, even if those employees do not make retirement plan contributions.
“This creates an excellent opportunity for employers to offer an incentive to attract and retain employees,” says Darr. She notes that it could prove to be an effective way to kick-start a retirement savings plan for younger workers who are burdened with college loans.
Auto enrollment in 401(k) plans
Employers currently have an option to initiate “automatic enrollment” of employees into a company-sponsored retirement plan, which means employees automatically participate in the plan unless they choose not to.
New proposals would require employers to establish automatic enrollment plans, with employees deferring at least 3% of their income annually into the plan and increasing it each year until they’re contributing 10% of their pay. “Auto enrollment can be beneficial to support retirement savings,” says Darr, “as long as individuals have sufficient cash flow to meet day-to-day expenses.”
Database of “lost” retirement accounts
People who change jobs may sometimes forget about money that was invested in retirement plans with previous employers. After years have passed, it isn’t always easy to track these plans. Both the House and Senate proposals call for the creation of a national online database of retirement accounts. This would help individuals track plans with previous employers.
Watch for further developments
New legislation that will affect retirement savers is one of several headline items on the docket for Congress in 2022, so it’s unclear how quickly action can be expected.
As you consider what new opportunities may be available to enhance your retirement savings in the future, take the time to assess where you stand today. Your financial professional can help you review your current strategy and discuss whether any changes are appropriate for you. You can also plan for any potential changes should new legislation be enacted.
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