In late 2019, the SECURE Act was passed as a way to help Americans save more for their retirement. In March 2022, the SECURE Act 2.0 passed in the U.S. House of Representatives and aims to improve the goals of the original SECURE Act. The Senate proposed a similar bill in May 2021, and as the House’s version moves forward, the two bills will likely combine before the final Senate vote. Here are what investors should know if the SECURE Act 2.0 passes as proposed:
- Required Minimum Distribution (RMD) age will increase from age 72 to age 75 with this RMD schedule:
- Age 73 starting in 2023 (for individuals who reach age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2030).
- Age 74 starting in 2030 (for individuals who reach age 73 after Dec. 31, 2029, and age 74 before Jan. 1, 2033).
- Age 75 starting in 2033 (for individuals who reach age 74 after Dec. 31, 2032).
- RMD penalties would decrease. Currently, missing an RMD triggers a 50% penalty. SECURE Act 2.0 would reduce this to 25%, and to 15% if promptly corrected.
- Qualified Charitable Distributions (QCDs) would be enhanced. Currently, people aged 70½+ can transfer up to $100,000 tax-free each year from IRAs directly to charity. SECURE Act 2.0 would index this for inflation and allow a one-time $50,000 transfer through a charitable remainder trust or charitable annuity.
- Catch-up provisions for 401(k) and 403(b) plan participants ages 62–64 would increase by an extra $10,000 per year. This is in addition to the existing $6,500 catch-up limit for those age 50+.
- Catch-up contributions must be made into a Roth IRA starting in 2023 (House version). Currently, employees can choose pre-tax or Roth accounts for catch-up dollars.
- Catch-up limits for IRA and Roth IRA owners ages 50+ would finally be indexed for inflation. The $1,000 extra limit has been frozen since 2006.
- Employees would be automatically enrolled in their employer’s retirement savings plan at a 3% contribution rate (opt-out available).
- Automatic contribution increases. Contributions would automatically rise by 1% each year, up to 10% maximum.
- Employer match flexibility. Employers could contribute their match into an employee’s Roth IRA or pre-tax account (currently only pre-tax).
- The Saver’s Tax Credit would simplify into one 50% credit, phasing out at AGIs of $24,000 (single), $36,000 (head of household), and $48,000 (joint).
- Employer matching for student loan payments. Employers could contribute a match while employees make student loan payments.
- Part-time worker eligibility. SECURE Act 2.0 would shorten 401(k) eligibility from three years to two years of service.
While the SECURE Act 2.0 hasn’t become law, it will impact investors differently depending on their situation. Keep in touch with your financial professional as the bill moves into the Senate or if you have questions about the act.
Sources:
Kiplinger: SECURE Act 2.0 Overview
Investopedia: House Passes SECURE Act 2.0
Congress.gov: Bill Text – H.R.2954
Important Disclosures
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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