Nearly one-fourth of Americans don’t have any retirement savings, and nearly 70% of Americans are concerned that they don’t have enough money for retirement. Moreover, only about one-third of Americans contribute to their 401(k) plan despite nearly 60% having access to them.
Let’s examine how the Secure Act addressed these challenges, how new legislation aims to expand upon these early changes, and the implications for your retirement portfolio.
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Setting the Stage
The Setting Every Community Up for Retirement Enhancement (SECURE) Act introduced several notable changes to long-term retirement savings when it became law in January 2020. These changes significantly altered the calculation of retirement savings for many people.
Some of the most significant moves included:
- The required minimum distribution (RMD) age rose to 72.
- There is no longer an age limit for IRA contributions.
- You must take RMDs from inherited IRAs within ten years.
- New parents can take penalty-free withdrawals.
- Long-term part-time employees may be eligible for 401(k)s.
These changes had positive and negative side effects. For instance, the part-time 401(k) plan will help millions take advantage of 401(k) accounts and maximize their retirement savings. But, on the other hand, a 40-year-old who inherits an IRA may face higher taxes due to the 10-year rule.
Check out some of the salient features of the Secure Act here.
What's in Secure 2.0?
There are at least two bipartisan bills in the House and Senate to build on the Secure Act. The so-called Secure 2.0 legislation could introduce more changes designed to address some key barriers preventing people from saving more for their retirement.
Some of the possible new provisions include:
- Employers could contribute to a 401(k) plan on behalf of employees making student loan payments, instead of contributing to their retirement plan or making a traditional 401(k) match.
- Catch-up contribution limits could increase to help older Americans save more for retirement in their later working years, although it could be as a Roth contribution.
- RMD age could increase to 73 in 2022, 74 by 2029, and 75 by 2032 while waiving RMDs for those with less than $100,000 in aggregate retirement savings.
- The caps on qualified longevity annuity contracts (QLACs) would be raised to $200,000, enabling more tax-deferred savings. ETFs may also be permitted to invest in variable annuity contracts.
- Employees may be automatically enrolled into 401(k) plans at a rate of at least 3% and then increase each year until the worker is contributing 10% of their pay.
The Secure 2.0 proposals also include provisions to create a national lost-and-found database for retirement plans that workers lose track of after leaving a job. There are also provisions to promote the saver’s credit that offers lower-income individuals a tax credit for retirement savings.
Adjusting Your Strategy
The original Secure Act introduced some key provisions that forced some Americans to rethink their retirement strategy. For example, the 10-year RMD rule makes it impossible for high-earning beneficiaries to spread out payments over a lifetime and consider alternate plans.
These provisions are often the ‘pay fors’ that specify how to offset any resulting revenue losses. While the Senate version of Secure 2.0 has no ‘pay fors’ yet, the House version has a few provisions that could impact retirement planning for millions of Americans.
The most significant change thus far is a provision for 401(k) catch-up contributions that would treat them as Roth contributions. Currently, workers can choose whether they want these contributions to be pre-tax or Roth contributions, assuming the employer has both options.
Investors should keep an eye on future proposals to both the Senate and House bills as they make their way through the legislative process. The ‘pay for’ provisions tend to come along later in the process but often have the most significant impact on retirement savings.
The Bottom Line
The Secure Act had several critical changes to retirement savings when it became law in January 2020. With Secure 2.0 going through the House and Senate, investors should keep an eye on the provisions that could impact their retirement planning.
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