What you need to know about SECURE Act 2.0!
As part of our proprietary process, The Questpoint FORMula, we are mindful that as your retirement journey progresses, key legislation changes will affect your retirement. These updated details may not be relevant to your retirement journey at this time, but we know as your life unfolds and your needs evolve, these pieces will become relevant and form an integral part of our panoramic planning process with you.
We would like to inform you, there is a pending bipartisan bill including provisions and enhancements to the SECURE, nicknamed “Secure Act 2.0”, or “Securing a Strong Retirement Act”. The overall reason for this bill is to increase benefits for small business owners offering their employees retirement benefits while also enhancing retirement distribution rules.
There are five key provisions to this bill:
1. Mandatory Automatic Enrollment Currently, employers who sponsor retirement plans with options for salary deferral contributions may include an automatic enrollment feature. Under this bill, the enrollment would change from optional to mandatory enrollment. Within this automatic enrollment, if a business sponsors a 401(k) plan, 403(b) plan, or SIMPLE IRA plan, they would be required to automatically enroll eligible employees at a minimum salary deferral rate of 3% of their compensation up to a maximum of 10%. All deferral contributions from employee’s salaries would automatically be withheld from eligible employee salaries and contributed to the applicable retirement account. Any employee who prefers not to be enrolled into the account must opt-out. The thought behind this provision, is not enough people are saving for retirement. This would affect any business with more than 10 employees, businesses that are more than three years old and those businesses who are not classified as a church or government entity.
2. Simplification of the Saver’s Credit To offset the cost of making a contribution to a retirement account, the Saver’s Credit was introduced to increase the likelihood of someone contributing to a retirement savings account. If an individual’s adjusted gross income and tax filing status allowed, eligible taxpayers could receive a 10%-50% non-refundable tax credit of the IRA and salary contributions up to $1,000.00. It seems a lot of individuals don’t take advantage of this credit, so the bill would change the sliding percentage scale to a flat 50% for all eligible individuals and also increase the contribution dollar limit to $1,500.00. There is also a provision for the Treasury Department to increase public awareness of this credit.
3. Enhancing Catch-up Contributions Currently individuals who are age 50 or older by the end of a given year, can make a “catch-up” contribution of $1,000.00. Historically, this has been very beneficial for those older individuals who are behind in saving for retirement. This rate has not changed since 2006. This bill proposes this rate would be indexed for inflation as of 2022.For employer level retirement plans, the “catch-up” contribution limit for salary deferral is $6,500.00 except for SIMPLE IRA’s, in which the limit is set to $3,000.00. Both these limits would respectively be increased to $10,000.00 and $5,000.00, also indexed for inflation, for individuals who are at least 60 years of age. Within this “catch-up” category of proposed provisions, is also the opportunity for an employee to make payments on a student loan, while their employer makes a contribution into the employee’s retirement account of the same amount-therefore increasing both the likelihood of the student loan repayment and increase in the amount of younger individuals saving for retirement.
4. Required Minimum Distributions Enhancement As of now, anyone who is 72 by the end of a given year, must take a required minimum distribution from their retirement account(s), unless the only retirement account you have is a ROTH IRA-there are no distributions which need to be taken from a ROTH IRA account. The bill proposes raising the age of required minimum distributions from 72 to 75. It also proposes, any individual whose combined IRA’s and employer plan account balances not exceeding $100,000.00 on December 31st of the year before an individual turns 75, not be required to take a required minimum distribution. This does not include defined benefit balances. The bill also proposes a reduced excess required minimum distribution rate. Currently, if you don’t take your required minimum distribution, you would be subject to a penalty of 50% of the required minimum distribution shortfall and applicable income taxes on the entire amount. The bill proposes lessening this to 25%. If the amount is not taken from an IRA, the rate is reduced further to 10%. This is all dependent on the individual taking care of this issue in a timely manner.
5. Qualified Charity Distribution Enhancement If you currently have an inherited IRA, you may make charitable contributions from these accounts of up to $100,000.00 currently. If the qualified charitable contribution meets applicable requirements, it is tax free to you. The bill proposes increasing this limit to $130,000.00 and allowing this to count towards their required minimum distribution for the year. In addition, currently all contributions have to be distributed to a 501c3. Proposed enhancement would open this up to allow for contributions into a charitable remainder trust, or charitable gift annuity-therefore also possibly reducing future estate tax due.
Our foundational approach is to continually be educated, in order to provide direction and solutions for your unique retirement planning process, as you pursue your financial independence. If you have questions or concerns about how these provisions will affect you, please contact us for more information. Please feel free to forward this piece to your family and friends.
Craig J. Watkins is an investment advisor representative of, and advisory services are offered through, USA Financial Securities Corp. Member FINRA/SIPC. A Registered Investment Advisor located at 6020 E. Fulton St., Ada, MI 49301. Cornerstone Financial Group is not affiliated with USA Financial Securities, CA License #0591010