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Secure Act 2.0

Prior to the 2020 election, we knew that regardless of who won, more tax law changes would likely be on the way. This spring, the Biden administration released the American Families Plan, which contains a multitude of tax proposals, many of which aligned with the plans he discussed during his campaign. We are closely following any developments related to these tax changes, but we anticipate negotiations will continue and the final plan will likely differ significantly from what was originally proposed. We’ll provide more in-depth guidance and tax planning ideas as we gain more clarity on what the final legislation might look like. If you’d like to review the various proposals, the Tax Foundation has a helpful website for tracking the Biden tax plans

There is another piece of legislation that has drawn much less attention, but which has significant bipartisan support in both the Senate and the House and is being dubbed the SECURE Act 2.0. You might remember the original SECURE Act, which was passed back in December of 2019, as the bill that pushed back the RMD age to 72 and eliminated the stretch IRA, among other items. There are currently bills in both the Senate and the House with roughly similar goals related to retirement savings. On May 4, 2021, the "Securing a Strong Retirement Act", HR 2954 was released in the House with a goal to “increase retirement savings, simplify and clarify retirement plan rules, and for other purposes”. In the Senate, lawmakers have introduced a similar proposal, called the “Retirement Security and Savings Act of 2021”

There are many similarities between the bills and there is broad bipartisan support for both. Most experts believe something will eventually be passed, but Congress is currently focused on other matters so it could be pushed off until 2022. Here are some of the major provisions of the bills that could impact you.

Required Minimum Distribution (RMD) start date pushed back again - Just as we were starting to get used to the change from age 70.5 to 72 for the start of RMDs under the original SECURE Act, it looks like more changes are coming. Under both plans, the RMD start date would be pushed to 75, but it will likely happen gradually. For example, under the House plan, RMDs would start at:

  1. 73 if you turn 72 from 2022-2027
  2. 74 if you turn 72 in 2028-2039
  3. 75 if you turn 72 in 2030 or later

While this will likely cause confusion for many, it also could open the door to additional tax planning opportunities for taxpayers who retire prior to their RMD age.

Catch-up Contributions Increased - Retirement plan contribution limits are increased regularly to keep up with inflation, but the additional “catch-up” contributions that are allowed after you reach age 50 have not increased since 2006! The new proposals would increase these catch-up contribution limits, but the amounts and ages at which you qualify differ between the bills and among different types of accounts. Both bills would also index the catch-up contribution limit for IRA’s to inflation.

Expanded Roth IRA Access - Under current law, SIMPLE and SEP IRAs are not allowed to accept Roth contributions from employees but both versions of this bill would change that. Matching contributions would also be eligible to be made on a Roth basis, whereas they are currently only allowed on a pre-tax basis. The House bill also includes a provision that would require catch-up contributions to be made on a Roth basis, though this seems unlikely to stick given that not all plans offer a Roth option currently.

Reduced limitations on annuities - The original SECURE Act expanded access to annuities in retirement plans by adding a safe harbor rule for ERISA fiduciaries in selecting a lifetime income provider. The SECURE Act 2.0 looks to further expand this access by removing the 25% cap on Qualified Longevity Annuity Contracts (QLACs) in retirement plans and eliminating the barriers to including annuities in plans and IRAs from RMD regulations. 

Qualified Charitable Distribution (QCD) limits increase - A growing number of taxpayers in recent years have taken advantage of the ability to gift up to $100k of their required minimum distribution to charity. This allows non-itemizing taxpayers to still receive a tax benefit from that deduction, as the amount donated would otherwise have been subject to ordinary income tax rates. The proposed House bill would index that $100k limit for inflation AND allow a one-time QCD to a split-interest entity such as a CRAT or CRUT. 

Other Items - There are a number of other provisions included the bills that will impact some taxpayers:

  • Increased income limitations for the Saver’s credit.
  • Automatic enrollment in newly created 401(k) and 403(b) plans.
  • Allowing employers to match contributions to an employee’s retirement account based on their student loan payment.
  • Expanded tax credits for small businesses who set up new retirement plans.

As always, these provisions are all subject to change prior to the final version of a bill being put into law. Due to the overwhelming support these bills currently enjoy, we do expect something along the lines of these two proposals to be passed in the not-to-distant future. We will continue to share any updates as the proposals move through the legislative process.

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.