Helpful Changes May Be Coming to Your Retirement Accounts

A new bipartisan retirement bill introduced in the U.S. House of Representatives last week could provide help to seniors, lower-income employees and workers who are carrying student loan debt.

Rep. Richard Neal (D-Mass.) and Rep. Kevin Brady (R-Texas) proposed The Securing a Strong Retirement Act of 2020. It's also called the SECURE Act 2.0, as it builds on the new law that took effect on Jan. 1, 2020.

The new legislation would raise the age at which seniors must start drawing money from their 401(k) plans and individual retirement accounts to 75.

It would also require administrators of 401(k), 403(b) and SIMPLE plans to automatically enroll eligible participants. And it would let employers contribute to certain employees’ retirement accounts even before the workers start putting money in themselves.

Let’s take a closer look at how The Securing a Strong Retirement Act of 2020 could affect you whether you’ve just entered the workforce or you’ve been retired for years.

Required Minimum Distribution Age Increased to 75

As of December 2019, individuals were required by law to start taking distributions from their 401(k) accounts by age 70.5. The SECURE Act increased that age to 72. Less than one calendar year later, the new legislation proposes to extend the required minimum distribution (RMD) age to 75.

The bill also calls for the RMD to be waived for anyone with less than a total of $100,000 in their retirement accounts on Dec. 31 the year before they turn 75.

Automatic 401(k) Enrollment to Become a Requirement

The SECURE Act 2.0 would mandate that businesses automatically enroll eligible employees in their company retirement plans.

If an employee becomes eligible to participate in 401(k), 403(b) or SIMPLE plan, the bill would expect companies to enroll them at a minimum 3% contribution and a maximum of 10%. Any figure less than 10% would increase by 1% per year until it reached that threshold.

In other words, unless the employee opts out of the plan, the company will divert at least 3% of his or her wages into a retirement plan.

That may sound oppressive if you’re not familiar with company retirement plans. But the federal government defined and approved automatic enrollment as an option back in 1998.

And Democrats on the House Ways and Means Committee cite studies that show automatic enrollment has dramatically increased participation rates among younger, lower-paid employees as well as Black and Latinx employees.

Put simply, many people just don’t make decisions about their 401(k)s during open enrollment periods, so this portion of the bill aims to make it easier. And employees always have the choice to opt out of the plans.

Student Loan Payments Would Qualify for Matching Contributions

Many employer retirement plans offer matching contributions: the company puts in the same amount as you do, up to a certain percentage.

It's a terrific benefit, but many young workers can't afford to contribute to their company retirement plans in the first place, because they're using a lot of their disposable income to repay student loans. Student loan debt has risen to a record $1.6 trillion this year.

If it becomes law, a provision in the SECURE Act 2.0 would allow employers to contribute funds to the company retirement accounts of workers who are paying off student loans — even if the employees themselves aren’t contributing.

This program could be a huge relief for many Americans who can’t afford to start saving for retirement early in their careers.

Beneficial Changes to Catch-Up Contribution Rules

If you’re 50 or older, federal law allows you to make “catch-up contributions” to your workplace retirement plan beyond the limit for other workers.

The current annual catch-up contribution limit is $3,000 for SIMPLE plans and $6,500 for 401(k) plans. This bill proposes an increase to $5,000 and $10,000, respectively, for those aged 60 and older.

The catch-up contribution limit for Individuals Retirement Accounts (IRAs) is $1,000 but currently is not indexed to inflation. In other words, that $1,000 is worth relatively less each year due to inflation.

The SECURE Act 2.0 would index the IRA catch-up limit to inflation beginning in 2022. This would also apply to SIMPLE and 401(k) catch-up limits.

Other Proposed Retirement Savings Changes

The Securing a Strong Retirement Act of 2020 also proposes to:

  • Simplify the rate structure of the $1,000 saver's tax credit for low and middle-income individuals by reducing to a single 50% rate.
  • Increase the saver's tax credit to $1,500 per person and increase the maximum income eligibility amount.
  • Award small employers a three-year tax credit of up to $500 annually for every military spouse they hire, provided the company makes those employees eligible for retirement plan participation within two months of getting hired.
  • Create a national, online "lost and found" for American retirement accounts. It would include companies trying to locate former employees to pay benefits and former employees trying to recover benefits from companies that may have moved, changed names or merged with a different company.
  • Allow employers to offer small financial incentives such as gift cards to employees who contribute to a retirement plan.

Final Thoughts

Regardless of your politics, it’s always nice when there’s bipartisan sponsorship of legislation that would benefit many members of the American public financially.

Saving for retirement can be challenging. The Securing a Strong Retirement Act of 2020 proposes changes that could help people grow their workplace retirement accounts. Other sections of the bill would relax rules to benefit small businesses.

If it passes, the bill could help millions of Americans in some way, whether they’re still working or drawing down funds in retirement.

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