The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act brought key changes to laws governing retirement plans. Among other things, the Act eliminated the age cutoff for traditional IRA contributions and increased the age for required minimum distributions (RMDs) from 70.5 to 72. The proposed SECURE Act 2.0 would further adjust retirement laws to make saving more accessible for Americans. Whether you’re saving enough to generate a good retirement income – or struggling to – it helps to understand how the SECURE Act 2.0 might affect you.
If you’re concerned about your retirement and want to make sure you’ll have enough money, consider working with a financial advisor to start planning for retirement now.
What Did the SECURE Act Do?
The original SECURE Act passed in 2019 made several reforms to laws regarding retirement plans. Specifically, here’s what the act did for retirement savers:
Ended the maximum age for contributing to a traditional IRA (Roth IRAs have no age maximum if you have earned income)
Raised the RMD age threshold to 72 from 70.5
Enabled certain part-time employees to participate in their company’s 401(k) plans
Allowed for penalty-free withdrawals of up to $5,000 from retirement accounts when those funds are used for qualified birth or adoption expenses
Allowed parents to make withdrawals of up to $10,000 from qualified 529 college savings plans for student loan repayment
In a nutshell, the SECURE Act has made it easier to save in a traditional IRA if you’re still working and choose to delay retirement. You’re no longer shut out from contributing to a 401(k) plan to enjoy tax benefits while saving from retirement simply because you work on a part-time basis. And it’s also easier to withdraw money from retirement accounts when funds are used for purposes allowed under the SECURE Act.
So, what will the SECURE Act 2.0 do and what could it mean for your retirement?
SECURE Act 2.0 Explained
The SECURE Act 2.0 that’s currently working its way through Congress would bring additional changes to retirement planning, some more notable than others. If it becomes law, here’s what you could expect.
Mandatory Enrollment for Defined Contribution Plans
Under SECURE Act 2.0, employers that offer defined-contribution plans such as 401(k)s would be required to enroll eligible new employees automatically. Those employees would be enrolled at a contribution rate of 3%, similar to the way many 401(k) plans operate now. But the annual contribution level would automatically be increased by 1% each year, maxing out at 15% of employee pay unless employees choose a different contribution rate.
This measure is designed to boost 401(k) plan participation rates and help workers increase retirement savings.
New Catch-Up Contribution Limits for 401(k) Plans
Employer-sponsored 401(k) plans have annual contribution limits, with separate catch-up contribution limits allowed for savers aged 50 and older. For 2021, the regular contribution limit is $19,500 while the catch-up contribution limit is an additional $6,500. SECURE Act 2.0 would introduce another catch-up contribution limit just for people aged 62 to 64. The limit, which would take effect in 2023, would allow those savers to add another $10,000 in catch-up contributions to their 401(k)s each year. The Act would also make all catch-up contributions subject to Roth guidelines for tax purposes.
Expanded 401(k) Eligibility
The 2019 SECURE Act allows part-time workers who log at least 500 hours over three consecutive years to join their employer’s 401(k) plan. Under SECURE Act 2.0, they’d still need 500 hours but they could earn them over two consecutive years instead of three.
The updated SECURE Act would also allow 401(k) plan sponsors to give employees the option of treating some or all of their elective salary deferrals as Roth contributions. Any money an employer matches that is designated as a Roth contribution would not be excluded from an employee’s gross income, however.
Increased Age for RMDs
The SECURE Act already pushed required minimum distributions back to age 72. SECURE Act 2.0 would push them back even further to age 73 beginning in 2022, then age 74 in 2029. Beginning in 2032, savers would not be required to take RMDs until age 75, offering a break to people who choose to delay retirement or want to draw down other retirement assets first.
Student Loan Match
One unique facet of the latest version of the SECURE Act would allow employers to make matching contributions to 401(k) plans based on employees’ student loan payments. These contributions would be subject to the same vesting requirements as other matching contributions. But it could offer some financial relief to workers who are so bogged down in student loan debt that they struggle to save anything for retirement.
Other Changes Under Secure 2.0
There are a few other provisions to know about with SECURE Act 2.0. If passed, the updated SECURE Act would also establish a national database to help Americans track down lost or missing retirement accounts. It would require the Treasury to make people more aware of the Retirement Saver’s Credit and how to claim it if they qualify. This credit can reduce tax liability for eligible retirement savers who qualify.
The Act would also carry over certain features of 401(k) plans to 403(b) plans. And it would make it easier for retirement plans to offer lifetime income annuities to savers. Annuities can be attractive for people who want to have a source of guaranteed income in retirement.
What SECURE Act 2.0 Doesn’t Do
If passed, the law could make saving for retirement more accessible but it doesn’t necessarily make it easier. That’s because the SECURE Act 2.0 doesn’t specifically address things like stagnating wages, increasing rent prices or a higher cost of living associated with inflation, all of which can make contributing to a 401(k) or IRA difficult. The Act does try to mitigate some of the financial burden associated with student loan debt but it doesn’t make withdrawing money from a 401(k) or IRA penalty- or tax-free easier.
The new version of the SECURE Act doesn’t make IRA savings automatic either. So if you don’t have a 401(k) at work and an IRA is your only savings option, you’ll still need to be disciplined about regularly saving yourself. But that’s easy to do if you open an IRA through an online brokerage account. You can simply schedule automatic deposits to your IRA weekly, biweekly or monthly, according to how often you get paid.
The Bottom Line
SECURE Act 2.0 could be a game-changer of sorts when it comes to retirement saving. Until it becomes law, savers can still benefit from the provisions of the original SECURE Act. And if you haven’t started saving for retirement yet, there’s no time like the present to begin building wealth for the future through your employer’s retirement plan or an IRA.
Retirement Planning Tips
Creating a well-rounded retirement picture starts with figuring out how much you need to save. Using a retirement savings calculator can help you estimate how much you need to set aside monthly or annually to reach your target retirement goals. Including tax-advantaged retirement plans, such as a 401(k) or IRA, in your savings strategy can help you make the most of every dollar you contribute. It’s also important to check your investment fees regularly, as fees can eat into your earnings.
Consider talking to your financial advisor about what SECURE Act 2.0 could mean for your savings strategy. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. It takes just minutes to get your personalized recommendations online. If you’re ready, get started now.
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