According to a recent Federal Reserve survey on household wellbeing, only 40% of non-retirees felt their retirement savings were on track.
As we celebrate #national401kday on Friday, September 9, 2022, it’s a great time to consider your retirement savings strategy and how your plan might incorporate some of the potential improvements coming soon.
A new set of provisions to help the way Americans save for retirement is moving through Congress and would build on the success of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act):
- SECURING A STRONG RETIREMENT ACT (H.R. 2954) passed by the House of Representatives on March 29, 2022.
- RETIREMENT IMPROVEMENT AND SAVINGS ENHANCEMENT TO SUPPLEMENT HEALTHY INVESTMENTS FOR THE NEST EGG (RISE & SHINE) ACT (S. 4353) approved by the Senate Health, Education, Labor, and Pensions Committee on June 15, 2022.
- ENHANCING AMERICAN RETIREMENT NOW (EARN) ACT approved by the Senate Finance Committee on June 22, 2022.
These bills, collectively known as SECURE Act 2.0, are going through the reconciliation process, which would likely produce a final bill that combines popular elements of each. Given strong bipartisan support and agreement that helping more Americans save—and save better—is good for the economy in the long run, final legislation is likely by the end of 2022.
Most Americans save for retirement with some form of a private, self-directed retirement savings account—e.g., 401(k), 403(b), Individual Retirement Account (IRA). The SECURE Act 2.0 legislation seeks to:
- Expand coverage to more people, especially improving access for part-time workers and those working for small businesses.
- Simplify and clarify plan rules so that retirement accounts are easier to administer.
Below we highlight the most likely items to become law and have impact on our clients.
Retirement plan rules
- The House and Senate would help small businesses in starting plans, increasing the small employer plan start-up credit for employers with up to 50 employees (House) or 25 employees (Senate).
- Long-term part-time workers were given the opportunity to participate in retirement plans after three years in the original SECURE Act; all three bills reduce this to two years, effectively changing the original SECURE Act rule retroactively.
- Currently, automatic enrollment and automatic escalation of contributions are allowed, but not required. The House bill requires many plan sponsors to automatically enroll employees with a 3-10% savings requirement for all new 401(k) and 403(b) plans. Though popular, neither Senate bills took this topic up, so its fate is uncertain.
- The House and Senate both include a provision for helping those paying off student loans to start retirement savings by qualifying for employer matching contributions. Qualified student loan payments would count as an elective deferral for match purposes. In other words, the employee pays toward their student loan and the employer makes a matching contribution as if it were a plan contribution.
Individual retirement accounts (IRAs)
- The IRA catch-up limit has been set at $1,000 since 2006. The House and Senate both propose indexing catch-up contributions in the same manner as regular IRA contributions. The catch up would have an increased limit sometime between ages 60 and 64, although the House bill and EARN Act each define a slightly different age range.
- In the House and Senate versions, a Roth option would become available for SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) IRAs, opening up the opportunity to make after-tax contributions. Employers would also have the option to designate matching contributions as Roth.
- Qualified Charitable Distributions (QCDs) from IRAs, currently $100,000 annually, would be indexed for inflation. In addition, IRA owners may elect a new one-time $50,000 (indexed) QCD to a charitable remainder annuity trust, charitable remainder trust, or charitable gift annuity.
Required minimum distributions (RMDs)
- The required minimum distribution age would increase from 72 to 75 in SECURE 2.0, allowing savings to grow for longer. The House bill gradually increases over several years with age 73 in 2023, 74 in 2030 and 75 in 2033, whereas the Senate proposes one jump from 72 to 75 in 2032.
- Both bills reduce the penalty for not taking RMDs on time. If an individual corrects a shortfall during a two-year window, the excise tax due would be 10% of the shortfall rather than the 50% due today.
Retirement savings actions to consider
- Should you be a small business owner, it may become more feasible to offer your employees a retirement savings plan. AMG specializes in small- to middle-market retirement plan administration services and can help you decide on the plan design that would work best for your unique participant population.
- With IRA catch-up limits likely increasing for those in their 60s, perhaps discuss with your advisor your cash flow and ability to make additional contributions—and whether those retirement savings should be directed to an IRA versus other types of retirement savings accounts.
- With after-tax Roth options potentially becoming more available, you may wish to discuss your asset location strategy with your advisor. Building your retirement assets with an eye toward your future withdrawal strategy can help with retirement and estate planning. We previously discussed the pros and cons of Traditional pre-tax and Roth after-tax contributions here: Deciding Between a Traditional or a Roth 401(k)?
- As QCDs count for required minimum distribution purposes, you may wish to reevaluate your planned giving strategy and whether the new $50,000 one-time election to certain split-interest entities makes sense for you. AMG advisors are skilled at designing wealth transfer strategies that meet your charitable and other gifting goals.
Read about AMG’s approach to Personal Financial Management (PFM) or contact us to learn more.