The House of Representatives passed the SECURE Act 2.0, otherwise known as the Securing a Strong Retirement Act. This bill changes the laws surrounding tax-advantaged retirement accounts in several different ways, but it’s particularly good news for two groups: late retirees and college graduates.
Consider working with a financial advisor as you weigh how changes to the RMD rule will affect your financial picture.
What is Secure 2.0?
The SECURE 2.0 Act expands on the retirement changes made by the SECURE Act, a previous bill passed in 2019. Both laws adjust employer-sponsored retirement plans in a variety of ways, from 401(k) start-up costs to simplified paperwork . Sponsors have described both the SECURE Act and SECURE Act 2.0 as cleaning up the retirement system as a whole, making it easier for workers to save and easier for employers to run their plans.
While not everyone will necessarily benefit from SECURE 2.0, it will touch most retirement accounts in one way or another. Two groups in particular will benefit from these new rules.
Late and wealthy retirees receive required minimum distribution increases
The SECURE 2.0 Act raises the age at which retirees must take required minimum distributions (RMDs).
Tax-advantaged retirement accounts like a 401(k) or traditional IRA come with a rule called required minimum distributions. This is the amount of money you need to withdraw from the account each year. Before you reach the RMD age, you don’t have to withdraw anything from your retirement account if you choose to do so.
As the IRS explains, “You cannot keep retirement funds in your account indefinitely. You generally must begin taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan when you reach age 70.5 [or 72 for those who reach 70 on July 1, 2019 or later].” The age limit was increased with the first SECURE Act, which was pushed from 70.5 to 72. The next version of the SECURE Act will add three years to that upper limit, raising it from 72 to 75.
The only major exception to this rule is a Roth IRA, which has no required minimum distributions. This is because the basis of the RMD rule is taxation. The IRS allows you to invest money tax-free in most retirement accounts, so it eventually wants to collect taxes on those funds. With a Roth IRA you’ve already paid taxes on your retirement fund, so the IRS doesn’t care much about how it’s managed.
The exact amount you should withdraw from a retirement account is based on a formula that includes your age and the amount of money in your account. The IRS bases this calculation on a sheet called the Uniform Lifetime Table.
For workers who choose to retire later or for retirees who want to delay withdrawals, the increased RMD limit can be a significant advantage. With more money in the retirement account for an additional three years, your account will enjoy additional tax-free growth to its maximum value. Additionally, when you start taking withdrawals, your required minimum distribution will be lower for any given year because the age limit increase changes the way the IRS calculates those withdrawals.
As people work later and live longer, healthier lives, this can be a major advantage for retirement planning. It can also be a big help for people retiring in a tough economic climate, as they have more flexibility to wait for a bear.
But critics have argued that raising the age limit for RMDs almost exclusively benefits wealthy retirees, since they are the ones who can afford to delay taking withdrawals from their retirement accounts. This benefit to high-wealth households comes at a significant cost to the federal government in uncollected taxes. The RMD rule was created to prevent people from using their retirement accounts as a tax and inheritance shelter, and each year the government extends the deadline means the IRS will collect less tax from both individuals and their estates.
A savings boost for graduates
Employees with student loans also get some help from the SECURE 2.0 Act. This is perhaps the most significant set of policy changes in the law.
Student debt has created a slow-growing crisis in millennial and Gen Z retirement accounts. Many graduates enter the workforce with significant, often high-interest debt, and prioritize paying off those loans over other financial concerns. As a result, they often have no retirement account at all, putting that money into debt.
The SECURE 2.0 Act makes two changes to try to help with this.
First, employers that offer a 401(k) or 403(b) retirement plan should automatically enroll all employees. Employees will still be allowed to leave the program if they wish. this law will simply reverse the current model. Instead of employees not participating in a pension plan unless they choose otherwise, employers would include everyone by default unless an individual opts out.
Employers are currently allowed, but not required, to automatically enroll their employees into office pension schemes. This has been shown to significantly increase participation, particularly among younger workers.
Second, and arguably more important, SECURE 2.0 expands the retirement system to account for student loan payments. Employers making matching contributions to retirement accounts can now do so based on both an employee’s individual contributions and student loan payments. For example, if an employee has paid $100 in a qualified, federally qualified student loan in a given month, their employer could contribute $100 to the 401(k). This is a significant departure from the current system, in which graduates who prioritize paying down debt cannot participate in an employer-run retirement plan.
“This section,” writes the House Ways and Means Committee, “is intended to help employees who may not be able to save for retirement because they are overwhelmed with student debt and thus miss out on available matching contributions for retirement plans. Section 109 would allow these employees to receive these matching contributions on account of repayment of their loan.” At least one-third of millennials and Gen Z graduates who hold student loans have delayed saving for retirement to prioritize student loan payments. While matching contributions would be voluntary for the employer, they could make a significant difference in the retirement planning rate for young workers.
After its passage in the House, SECURE 2.0 has now moved to the Senate, which is expected to pass a largely comparable version of it.
The House of Representatives passed a pension bill called SECURE 2.0. The new law will bring numerous changes to the way superannuation works, with two major adjustments for late and wealthy retirees as well as student borrowers.
Advice for pensioners
SmartAsset’s asks the question everyone is afraid to answer: Will student loan debt haunt you until retirement?
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