IRA Financial’s Adam Bergman Esq. discusses new retirement legislation that has been introduced, dubbed SECURE Act 2.0, and how it may affect retirement savers if it becomes law.
On Tuesday, October 26, 2020, Richard Neal, the Ways and Means Committee Chairman, and ranking Republican member, Kevin Brady introduced the Securing a Strong Retirement Act of 2020, also known as SECURE Act 2.0. This is an extension of the original SECURE Act, which was signed into law last December. The bipartisan bill introduces new rules for retirement planning. Mr. Bergman discusses the provisions and gives his opinion on each one.
What is the SECURE Act?
The original SECURE Act, which went into effect in 2020, was the first major piece of legislation for retirement savers in some time. For the most part, it was well-received by people on both sides of the aisle. The goal was to make it easier for Americans to save for retirement and to allow them to save for longer. It also incentivized business owners to start retirement plans for their employees.
Key SECURE Act Provisions
Here are a few of the major provisions of the original SECURE Act. First, it eliminated the age limit for making traditional contributions. Before the Act, you could not contribute to a traditional IRA after age 70 1/2. Note: Roth IRA contributions were always allowed. Therefore, if you have earned income, you can contribute to an IRA, no matter your age. Further, more types of income, such as non-tuition fellowships, can be considered as income.
A major change was upping the RMD age. Required Minimum Distributions started at age 70 1/2, before the Act. The SECURE Act upped the age to 72, meaning you do not have to withdraw from the plan for an additional 18 months. This allowed your funds to grow without tax longer. This was one of the best provisions as people are living longer.
The one major provision that was frowned upon by most was the elimination of the so-called Stretch IRA. When you pass on, you can leave your IRA account to a beneficiary. Spouses can essentially claim the IRA as or his or her own. However, non-spouse beneficiaries, such as a child, face different rules. Before the Act, they could stretch the IRA distributions over the course of their lifetime. This afforded them tax-advantaged funds for their lives. However, the SECURE Act eliminated that rule. Starting in 2020, the IRA funds must be completely withdrawn within ten years.
The rest of the provisions pertain to 401(k) plans. First, an individual has until Tax Day to start a Solo 401(k) for the previous year, instead of December 31 of that year. The Act also increased tax credits for businesses starting a new 401(k) plan.It also adjusted the Multiple Employer Plan rules, so that it’s easier for unrelated businesses to combine to offer a retirement plan.
SECURE Act 2.0 Provisions
On the heels of the original Act, SECURE 2.0 looks to help out retirement savers even more! Here are a few key provisions of the new act:
- RMD Age – Would increase from age 72 to 75. That’s 4 1/2 more years you can let your funds grow compared to 2019 and earlier.
- Auto Enrollment – Employees will be automatically enrolled into the company plan when a new one is created.
- Saver’s Credit – Increase and simplify federal tax credits for saving for retirement
- Student Loans – Allow individuals to pay off their student loans, instead of contributing to a 401(k), but still receive an employer match for their retirement.
- Non-Profits – Allow groups of non-profits to join together to offer a retirement plan to their employees.
- New Catch-up – Add another catch-up contribution when individuals reach age 60.
- Errors – Eliminate the stiff penalties for individuals who make inadvertent mistakes while dealing with their IRAs.
- Finding Lost Funds – Creating a database that will allow people to find lost retirement accounts, such as a 401(k) from an old job.
As he always says, he loves the American retirement system, since it’s a bipartisan system. Elected officials from all walks of life want Americans to better prepare for retirement. It all comes down to simple math. The more you save and the longer you save, the more you will accumulate! We don’t know how and when the SECURE Act 2.0 might go into law, especially with the election pending. Retirement is never a hot-button issue during these times. However, as we have seen with the original Act, legislation is needed to encourage more Americans to save.
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