Secure Act 2.0 and How It Could Affect Your RMDs, Taxes and More!
There’s a myriad of updates coming out of Washington. Here’s what you need to know to stay up to date so we can plan accordingly. The U.S. House of Representatives approved House Resolution 2954- commonly referred to as Secure Act 2.0. The next step for the legislation is for the House and Senate to work together to reconcile the bill, which has strong bipartisan support. A final passage is expected in the fourth quarter of 2022. It is important to note that there are items in the bill that could potentially impact taxpayers as early as this year.
Here are the key planning provisions:
· Expansion of the IRA Qualified Charitable Distributions
o Qualified Charitable Distributions (QCD) can be made from an Individual Retirement Account to a charity and be excluded from income up to $100,000 annually for those over 70 ½.
o These Qualified Charitable Distributions can count as all or part of your RMDs, but they are not taxable, and cannot be added to your adjusted gross income.
o QCD’s cannot be deducted as a donation on your tax return.
· Delay the start of Required Minimum Distributions (RMDs) from 72 to 75
o Currently, required minimum distributions (RMD) rules participants are generally required to begin taking distributions from their retirement plan or IRA at age 72.
o The bill would increase the RMD age from 72 to 73 in 2023, to 74 in 2030, and ultimately to 75 in 2033.
o Currently, if you fail to take your RMD, the shortfall is hit with a 50% excise tax. However, under Secure Act 2.0, this would be reduced to 25%.
- If the mistake is corrected in a timely manner, the penalty would be further reduced to 10%.
· The Catch-Up Contribution Limit (Age 50 or older)- Increase and Index for Inflation
o Under current law, workers who are at least 50 years old can make catch-up contributions to their retirement accounts above the normal contribution limits.
- For 2022, these workers can contribute an extra $6,500 to 401(k) and 403(b) plans after hitting this year’s $20,500 limit.
- For a SIMPLE IRA, they can add $3,000 more to the $14,000 cap in 2022.
o Under the Secure Act 2.0, earners who are age 62, 63 or 64 would be able to contribute even more to these accounts.
- For 401(k) and 403(b) plans, these employees would be able to contribute up to $10,000 in catch-up contributions.
- SIMPLE IRA could put in up to $5,000 in catch-up contributions.
o These catch-up limits will now be indexed for inflation each year.
- Since 2006, the annual increase in catch-up contribution amounts have been limited to only $1,000.
· Mandatory Auto Enrollment/Escalation
o Employers would need to offer contribution plans that automatically enroll eligible new hires at an initial pretax contribution level of at least 3%, up to 10% of pay.
- If an initial rate of less than 10% is elected, the contribution rate will need to increase annually by 1% each year until 10% of pay is reached.
- Employees would have the opportunity to elect different contribution levels on an individual basis.
- These changes would apply to new 401(k) and 403(b) plans created after the bill pass date and all current plans would be grandfathered into existing plan design.
o Under the first Secure Act, companies that offer a 401(k) plan are now required to allow employees who work at least 500 hours a year, for three consecutive years, to contribute to a retirement account.
- The Secure Act 2.0 reduces the three-year rule to just two years.
· Small Business Tax Credit
o The new bill also creates a tax credit that encourages small businesses to offer a retirement savings plan.
o This is a new credit that encourages small employers to make direct contributions to their 401(k) plan for their employees, offsetting up to $1,000 of these employer contributions for each participating employee. This is a fantastic opportunity for small businesses to promote the importance of retirement savings while helping their bottom line.
o Additionally, there is a tax credit that will help cover 100% of these costs for small employers to implement a startup 401(k) Plan for the first three years of the plan.
· Treatment of student loan payments as elective deferrals for purposes of matching contributions.
o The proposal would permit an employer to make contributions under a 401(k) plan, 403(b) plan or SIMPLE IRA, with respect to “qualified student loan payments.”
o Governmental employers would also be permitted to make matching contributions in a section 457 plan or another plan with respect to such repayments.
The Secure Act 2.0 recognizes the reality that many Americans are not saving enough for retirement. On average, most Americans are saving around 8.5% of their income toward retirement when it should be around 10-15%. The new bill takes a parental approach to ensure employees contribute a suitable amount for their future and encourages employers to better prepare employees for retirement. The Secure Act 2.0 has only passed in the House and has not been signed into a law. We will provide updates as the bill develops and materializes. Depending on your age and circumstances, we encourage you to reach out to us to discuss what action you should be taking and how this could potentially impact your financial plan going forward. As always, we welcome the opportunity to review your investment portfolio and estate planning documents to make sure the appropriate strategies and vehicles are being optimized.