Who’s ready for round 2? With the passage of the SECURE Act in 2019 we saw many changes to retirement savings plans. Now, Congress is considering further changes to promote retirement security for Americans.
The SECURE Act 2.0 passed the U.S. House of Representatives with overwhelming bipartisan support (414-5). The Senate’s version of the bill is widely expected to pass as well. The bills are not identical and will have to be negotiated in reconciliation, there are some broad provisions we can start thinking about now from a planning perspective.
- A gradual rise in the age for Required Minimum Distributions (RMDs)
- Indexing IRA catch-up contributions to inflation
- A supersized $10,000 catch up contribution limit for retirement plan participants age 62-64
- Forcing all catch-up contributions in employer based retirement plans to be Roth
- Indexing the limit for Qualified Charitable Distributions to inflation
- Reducing the penalty on missed RMDs
Increase in the age when Required Minimum Distributions: Let’s start with the proposed increase in the age when Required Minimum Distributions would be required to begin. Currently the age at which you have to start taking Required Minimum Distributions from your IRAs is 72. The proposed law would gradually increase that age over time. Here’s the currently proposed schedule:
2022 RMD age 73
2029 RMD age 74
2032 RMD age 75
IRA Catch-Up Contributions would be indexed to inflation: There is currently a $1,000 catch-up contribution permitted for IRAs when you turn 50. The SECURE Act 2.0 will not index this amount to account for inflation.
Catch-Up Contributions: for those ages 62 through 64, who participate in an employer-based retirement plan, there would be an increase of catch-up contributions. Under the proposed law, you would be able to make catch-up contributions of $10,000 (instead of the current limit of only $6,500). If you fit this age range, and have the financial ability to save more, this provision will benefit you.
Roth Contributions: The proposed bill would allow employers the option for employer contributions to be Roth. Previously, your employer could only put their match into a pre-tax account. This would be an employee-elected decision if their employer makes it available within their retirement plan.
Roth Only Catch-Up Contributions: Speaking of Roth, all employee catch-up contributions in an employer-sponsored plan would be Roth. That is, if you are over the age of 50, your catch-up contributions would have to go into a Roth account. For high income tax earners this could be a tax hit since you may be looking to defer your income into a pre-tax account to reduce your current income taxes.
QCD Contribution Limits Indexed: if you are age 70 ½ or older, current Qualified Charitable Distributions (QCDs) would be indexed to account for inflation.
Reduced penalties: the penalty for missing RMDs will reduce from 50% to 25% and to 10% if the payment is made up in a timely manner.
Spark will continue to monitor this change in legislation and keep our clients in the loop, as well as monitor how this affects our clients’ plans. If you have any questions, or would like to know how the SECURE Act 2.0 could affect you and your plan, please don’t hesitate to reach out.
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