Updated: Apr 25
Recently the U.S. House of Representatives passed the Secure Act 2.0. The bill possessed wide bipartisan support by proposing some very welcomed changes. In this article, we will talk about the big changes in the original Secure Act, the one big proposed change in the Secure Act 2.0, followed by changes that could affect investors 50 and older, and lastly what will happen moving forward.
Let us start with the original Secure Act. The Secure Act was passed in December 2019 and was soon forgotten thanks to the rise of Covid. There was a multitude of changes that came with the legislation, but two stick out more than others. The first was the change to the Required Minimum Distribution (RMD) age. The Secure Act changed the RMD age from 70 ½ to 72. Moving back the RMD age 1 ½ years does not appear to be a substantial change, but it can be for those who are executing long-term tax planning and estate strategies, such as Roth conversions.
The second big change in the original Secure Act was eliminating the Stretch IRA. The Stretch IRA allowed non-spousal beneficiaries of an IRA to take distributions of the Beneficiary IRA over the beneficiary’s life expectancy. By eliminating the Stretch IRA, most non-spousal beneficiaries have just 10 years to withdraw all funds from the Beneficiary IRA, if inherited after 2019. This could potentially lead to devastating tax bills and much, much tougher tax planning for a beneficiary who is in their prime working years. This has impacted the increased desire for an IRA holder to complete Roth conversions, ultimately helping with estate planning too.
Now, for the Secure Act 2.0. There is one big change in the proposal and a few less prominent changes. The biggest change is the change in RMD age to 75. This would add another three years to the RMD age, resulting in an extra 4 ½ -years from the original 70 ½ requirements before the original Secure Act. I find this a very welcomed change as life expectancy continues to rise, only making it right the RMD age would also continue to rise. The bill proposes to change the age over the next decade. First changing the age in 2022 to age 73, next in the year 2029 to age 74, and lastly in 2032 to age 75. The change would give retirees and advisors more time to execute a long-term tax plan and estate strategy to help minimize taxes paid on their retirement assets – not only for the account holder but for their heir(s) who inherit the assets, too.
The Secure Act 2.0 also proposes changes to retirement plans for individuals who are eligible for catch-up contributions. If passed, the bill would increase the catch-up contribution limit for individuals ages 62-64 to $10,000 for 401(k) plans and $5,000 in SIMPLE plans. This is higher than the current $6,500 and $3,500 limits, respectively. But if I am being honest, this does not move the needle much for people nearing retirement. Being able to contribute an additional $3,500 to their 401(K) or $2,000 in their SIMPLE for three years, will not substantially help them prepare for retirement.
The next proposal is requiring all catch-up contributions in employer retirement plans to be Roth contributions. This means if you are 50 or older and contribute more than $20,500 to your 401(k), any additional contributions would have to Roth – eliminating your current-year tax deduction on the amount contributed in excess of $20,500. I personally do not like this rule, because individuals are typically in their peak earning years later in life, which typically means landing in a higher tax bracket. Successful tax planning involves paying taxes at the lowest rate possible. But if this bill passes, individuals over age 50 won’t have a choice if their catch-up contributions are made before or after-tax, potentially making catch-up contributions less valuable. I believe it should be left up to the investor to ultimately decide.
The fourth proposal indexes the catch-up contribution of $1,000 on IRAs for inflation. This seems like a common-sense idea. Currently, the catch-up contribution does not change unless Congress votes to increase it. This proposal would make future changes automatic.
Lastly, what’s next? The bill is currently sitting in the Senate and is expected to be voted on this spring or summer. I expect a few tweaks to the bill before the Senate vote, but with large bi-partisan support in the House (414-5 vote), I would expect nothing different in the Senate. Be on the lookout for these changes potentially coming before 2023.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at firstname.lastname@example.org.