TU IS
(This article was co-produced with Hoya Capital Real Estate)
Introduction
Is it possible that the US Congress did something that will actually benefit American savers? The answer is YES as President Biden, just before Christmas, signed the bill that contained the Setting Every Community Up for Retirement Security Act, better known as the SECURE Act, into law.
Of course, nothing Congress does is clear and straight forward, so I found numerous documents to try not miss anything of importance. My hope is readers will mention via the comments section any provision I did not list they think should have been, or even correct ones I listed if their understanding differs: that is an important part of Seeking Alpha articles.
Naturally, some provisions start in 2023, others later; plus some provisions do not apply to all plan sponsors. I chose to list the provisions in order I deemed to be the most important or biggest changes from current policy.
Required Minimum Distributions
The required beginning date age for commencing retirement plan distributions increases to age 73 starting on January 1, 2023, and then further increases to age 75 starting on January 1, 2033. On a personal note, this means my wife doesn’t have to start in 2022 (Yeah!). Pre-death required minimum distributions are not required for Roth amounts held in an employer retirement plan starting 2024.
Modifies the required minimum distribution rules to eliminate perceived barriers to the availability of certain common lifetime annuity features (e.g., period certain guarantees, guaranteed annual increases of modest amount, etc.) for commercial annuities that are issued in connection with any eligible retirement plan.
Expands availability of Qualified Longevity Annuity Contracts (QLACs) by eliminating the 25% restrictions and raising the maximum to $200,000 (as indexed), and permits QLACs to include certain other features.
Source: morganlewis.com
I had to look elsewhere to find what the “pre-death” change referred to and my understanding is I am affected. Roth IRAs do not require RMDs before the owner dies but Roth 401(k) accounts did. So if I survive 2023, when I reach RMD age (73 under the new rules), I won’t have to take RMDs from that account after all, which gives me the options of leaving it alone, not converting it to a Roth IRA. QLACs remove the funds from the account, thus reducing future RMD levels. On a personal note, this means my wife doesn’t have to start in 2022 (Yeah!).
Enrollment
All new required plans must contain a provision that automatically enrolls employees and have provisions that automatically escalates participants’ deferral percentage. More specifically, employees must be automatically enrolled at a contribution percentage of at least 3%, but not more than 10%, and their contribution percentage must automatically increase by 1% on the first day of each plan year following completion of a year of service until the contribution is at least 10%, but no more than 15%. Employees are allowed to opt out of of both or either provision.
Source: morganlewis.com
It appears the language grandfathers existing plans though I think most major ones already have an auto-enrollment policy. Also, studies have shown that both “auto” provisions, where in place, have increased both participation and savings rates.
Contributions
Employees who are age 50 or older currently are eligible to make additional “catch-up” contributions to eligible retirement plans up to certain inflation-adjusted limits ($6,500 for 2022). Effective for tax years beginning after December 31, 2024, these catch-up contributions will be increased (to the greater of $10,000 or 150% of the “regular” age 50 catch up contribution amount) for employees who are reach ages 60, 61, 62, or 63 during the year.
Source: morganlewis.com
Catch-up contributions
The post-2024 provisions are new and will allow employees to save more, supposedly in their highest earning years. For the first time, the additional amount those 50+ can contribute to an IRA each year will be indexed to inflation. Part-timers would have to be enrolled in their employer’s 401(k) after two years, instead of the current three.
But what the government gives, they sometimes take some back and that applies with the “catch-up” contributions.
For certain plans, these contributions for employees whose wages exceed $145,000 (as indexed) must be made on a Roth basis. This Roth treatment of catch-up contributions is mandatory for any plan that makes catch-up contributions available. Plans may offer employees the ability to elect for some or all of the matching or non-elective employer contributions made to them under the plan to be characterized as Roth contributions, but only if the contributions are fully vested at the time they are made.
Source: morganlewis.com
Like when the SECURE ACT 1.0 added the 10-year drawdown of retirement accounts change, this change was designed to be a revenue raiser as it moves matching funds from pre-tax to post-tax.
Paying down student loans now possible
Plan sponsors are able to make matching contributions to employees for certain “qualified student loan payments” made by the employees for higher education expenses and to have these matching contributions treated as regular matching contributions for discrimination testing purposes. This provision is intended to make it easier for employers to provide employer-matching contributions to employees who are paying off student loans in lieu of making retirement plan contributions.
Source: morganlewis.com
Savers credit improvement
Current law allows low-income savers to get a partial tax deduction if they put their own money into a retirement. Starting in 2027, these savers will be eligible instead to receive a government-funded matching contribution to their individual retirement account (IRA) or retirement plan in an amount up to 50% of their contributions (phased out as the individual’s income increases), capped at a maximum of $2,000 and reduced by certain distributions that are taken by the individual. Big caveat: The match has to be repaid to the Treasury if you pull the money out before retirement.
Source: morganlewis.com
Neither document mentioned whether the income limits are inflation indexed.
Emergency Savings
Participants would be permitted to withdraw up to $1,000 in one withdrawal per year without an early-withdrawal tax penalty. Employers could also offer a retirement plan-linked emergency savings account that would allow four penalty-free withdrawals per year. Employees could contribute a maximum of $2,500 to such an account.
Source: morganlewis.com
Penalty-free withdrawals for hardships
The Act adds several new rules that allow employees to withdrawal funds without penalty regardless of age, under the Hardship withdrawals section.
Participants would be permitted to withdraw up to $1,000 in one withdrawal per year without an early-withdrawal tax penalty. They would have the option to repay this amount in three years and could not withdraw in this fashion again for three years unless the earlier withdrawal has been repaid. Employers could also offer a retirement plan-linked emergency savings account that would allow four penalty-free withdrawals per year. Employees could contribute a maximum of $2,500 to such an account.
Participants could withdraw up to $22,000 to pay for expenses related to a natural disaster, which would be taxed as gross income over three years without additional penalty. Survivors of domestic abuse could also withdraw the lesser of $10,000 or 50% of their retirement account without penalty upon self-certifying as a survivor of domestic abuse.
Source: planadviser.com
Increase in Small Benefit Cash-out Limit and Offer of Automatic Portability Provision
The Act increases the minimum size from $5000 to $7000 where the Plan can force the employee out. It also makes it easier for retirement plans and recordkeepers to offer automatic portability provisions for amounts transferred to a default IRA, eliminating the need for the employee to initiate the action.
Source: morganlewis.com
Whether the employee can block the transfer was not mentioned, depends on what Congress means by “offer”. Another site said retirement plan providers can automatically move a tiny old 401(k) into an employee’s new 401(k) without their consent.
529-to-Roth IRA rollovers allowed
Once the 529 has been established for 15 years, 529 beneficiaries can roll up to $35,000 from their 529s into their Roth IRAs. This is not an addition to their annual contribution but a replacement for it. Basically, if you over save for college, newly graduated students can use their $6,000ish per year for something besides Roth IRA contributions and still get their Roth IRA funded. This won’t work for Backdoor Roth IRA contributions.
Source: whitecoatinvestor.com
My analysis of SECURE Act 2.0
- Delaying the start of RMDs is a positive for those who do not need them to live on. Extra years of tax-free growth will increase their balances, everything else being equal.
- Not a fan of QLACs, so improvements there I see as neutral for some but nice for those who want an annuity. I reviewed QLACs here.
- With a student debt crisis (or not), having the ability to use company-match funds to reduce one’s balance is a good thing, especially if the interest is high. Lower debt levels have other benefits when buying a house too.
- When I was maxing out my catch-up contributions, many of my colleagues couldn’t as they had kids in college. Allowing higher levels later when those bills might have stopped/decrease allows them to make up for lost years.
- Special emergency/disaster/hardship withdrawals is good but they come with limits. This sounded better than other choices now available: taking a loan or stopping some/all contributions, both of which have potential major negative consequences. This could allow someone to exit a bad relationship as lack of funds sometimes prevents that.
- 529 rollover. It is hard to know if these funds will be used for college. I believe if not, they become taxable income, maybe with a penalty attached. Rolling into a Roth is a definite positive; would be even better if it could be used to setup a Roth IRA for your kids.
- I like that some employer matching contributions can be designated as Roth contributions, meaning they grow tax-free.
Portfolio strategy
Except for making the “catch-up” contributions move from pre-tax to post-tax, there doesn’t seem to be any other “gotchas” in the SECURE Act 2.0, but others might know of a provision like that and will hopefully add those as a comment thus readers are totally aware of what Uncle Sam expects.
It is another reminder that everyone needs to pay attention to what Congress is up to. Employers should be communicating to their employees how they and/or their plan is affected and when, as not all parts of the law start right off.
At a minimum, savers should:
- Look for a communication from the plan sponsor related to any changes effective in 2023 apply to their plan or them specifically.
- If you think your “catch-up” contributions will be affected, check your tax withholdings so you aren’t caught short come next December. It also might mean you are getting a Roth version of your plan for the first time.
- If you have student loans, you have a year to find out if your loan qualifies for your employer’s matching contributions to be directed there. By then, one has to assume loan payments will have restarted.
- If you have a CPA or tax-prep specialist, get their opinion on your situation.
Be the first to comment