Once again, there are retirement planning reforms for Americans on the horizon. The SECURE Act 2.0 recently passed through the House and is currently making its way through the Senate for final approval by the end of the year. Whether the provisions in the SECURE Act 2.0 bill pass the Senate in their current form or not remains to be seen. But experts feel most are welcome additions to the initial SECURE Act reforms passed in 2019.
The Securing a Strong Retirement Act (SSRA) is more commonly called the SECURE Act 2.0 as it expands the provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in 2019. For details of what was passed in the first SECURE Act, refer to this article published by the American Society of Pension Professionals and Actuaries.
Below is a summary of a few proposed SSRA (SECURE Act 2.0) provisions we feel are most important for you to know.
Proposed SECURE Act 2.0 Reforms that Impact Retirement and Retirement Planning
If the SECURE Act 2.0 passes in its current form, here are some changes you can expect:
Automatic enrollment for employer-sponsored retirement plans
This provision requires automatic enrollment for employees in new qualified 
plans such as a 401(k). Employees do have the right to opt out, but those who participate can start with a contribution of 3% of their income and can increase contributions to up to 10% over time. This provision allows an exemption for businesses less than three years old and for those with fewer than 11 employees. Although there is a grandfather clause allowing some plans to opt out, all new plans are expected to comply.
Limit on penalty for prohibited transactions
Under the new law, prohibited transactions in your IRA won’t impact your entire IRA balance (as is the current law). The SECURE Act 2.0 would limit your liability to the amount relevant to the specific prohibited transaction. For example, if your IRA is worth $100K and the amount involved in the prohibited transaction was $30K, then only the $30K would be subject to penalties and taxes.
Change in age to take required minimum distributions (RMDs)
The SECURE Act of 2019 pushed the age to take RMDs from 70 ½ years of age to 72. The current 2.0 bill would extend that age as follows:
- If you turn 72 after 2022, you must start RMDs at age 73
- For those who turn 73 after 2029, you must start at age 74
- And people who turn 74 after 2032 must start RMDs at age 75
This is helpful in that it would give your hard-earned savings more time to grow before RMDs kick in. However, many people may need access to their retirement funds before they reach the ages outlined above. Careful and strategic planning with your financial advisor is critical if this provision passes.
Allowance for an employer match to help student loan borrowers
This SECURE Act 2.0 provision would allow employers to make retirement plan matching contributions for employees who have student loans. The amount of the employer match would equal the student loan payment paid by the employee. Obviously, this would be a great financial help to offset the challenge of student employees who often cannot pay down student loans and make retirement plan contributions at the same time.
Expansion of retirement plan catch-up contributions
Currently, retirement plan contributors 50 years and older are allowed and encouraged to make annual catch-up contributions to their retirement accounts. The catch-up amount depends on the type of plan they have.
The SECURE Act 2.0 expands these contributions for those ages 62-64 as follows:
- 401(k) and 403(b) plan owners’ catch-up contributions would increase from $6,500 to $10,000
- SIMPLE IRA and SIMPLE 401(k) plan owners would enjoy an increase to $5,000
Additionally, these catch-up contributions are to be:
- Indexed to accommodate inflation
- Made as post-tax Roth contributions, with the potential of providing tax-free growth and tax-free distributions in retirement
Employer match contributions in Roth form
This means employer matching contributions would be treated as Roth contributions—post-tax and again allowing for tax-free growth and tax-free distributions of such. While this would be an incredible advantage for employees, it may create challenges for employers to navigate management of employer plans.
Roth contributions for SIMPLE and SEP IRAs
These plans already have higher contribution thresholds than some other plans. The ability to make Roth contributions to SIMPLE and SEP plans would be advantageous to plan owners—again offering tax-free growth and distributions of Roth dollar contributions in retirement.
Excess contribution compliance becomes the sole responsibility of plan owners
Every retirement plan has annual contributions limits set by the IRS. Contributing more than those allowances can trigger financial implications for you and your account. The SECURE Act 2.0 would relieve plan administrators the burden of tracking plan owners down to rectify any overpayment/excess contributions made to their plans.
What You Can Do While Waiting for this Legislation to Pass
As we mentioned at the beginning of this article, it remains to be seen what elements of the SECURE Act 2.0 will be included and/or changed a bit when this bill passes into law. However, while we wait to see how it pans out, it is important you understand how the provisions impact your retirement planning in the here and now, as well as your life in retirement.
Your tax advisor can help you evaluate these potential changes to ensure you are able to take full advantage of the positives and to prepare for any negative impacts (if any) these changes may cause.
We believe the provisions mentioned in this article present positive scenarios for American retirement savers. If you have any questions on how the SECURE Act 2.0 may impact your self-directed retirement plans, please contact Advanta IRA today.
