It’s not often that politicians agree about anything, but in a rare vote in the U.S. House of Representatives, men and women, Republicans and Democrats, liberals and conservatives voted 414 to 5 in favor of the Secure Act 2.0, a series of changes to retirement savings plans. You can see the entire list of changes here. The bill builds on the first Secure Act passed in 2019 in an attempt to help Americans create larger pools of money to fund their retirement.
Among the provisions in the bill:
- Employers would be required to automatically enroll eligible workers in 401(k) plans at a rate of 3% of salary, which would increase annually until the employee is contributing 10% of their pay. Employees could opt out or select a different contribution amount. Businesses with 10 or fewer employees or are less than 3 years old would be excluded from the mandate.
- Under current law, employees in a 401(k) plan who are 50 years old or older can make catch-up contributions of $6,500 each year. Secure 2.0 adds another layer. Individuals aged 62, 63, and 64 can make catch-up contributions of $10,000 per year.
- Under current law, you have to begin taking Required Minimum Distributions (RMD) at age 72. Secure 2.0 increases that to age 73 in 2022, age 74 in 2029, and age 75 by 2032.
- The bill would create a national registry to help workers find orphaned 401(k) plans left behind when they changed jobs.
- It requires more small employers to sponsor retirement plans.
- If you borrow money from a 401(k) to pay student loan debt, an employer can match the student loan payments and classify the match as an employer retirement contribution.
The bill also expands saving retirement money in Roth accounts, which is money saved in a tax-deferred account that can be withdrawn tax-free after age 59 ½. It mandates that:
- All catch-up contributions to employer retirement plans must be made as Roth contributions, not pre-tax contributions.
- For the first time, employees could choose to receive employer matching contributions as Roth deposits.
- SIMPLE IRAs would be allowed to accept Roth contributions.
- Individuals could classify employee and employer SEP-IRA contributions as Roth money.
Why the push to get more money into Roth accounts? Because you don’t get a tax deduction for contributing to a Roth, so the U.S. Treasury gets more money upfront when people go the Roth route. It’s one of several current proposals to collect additional taxes that include:
- Taxing unrealized capital gains at death
- Raising the top tax rate on capital gains and dividends from 20% to 39.6%
- Raising the top tax rate on individual income from 37% to 4%
- Raising the corporate tax rate from 21% to 28%
All that said, in the right circumstances contributing to a Roth, or contributing more to a Roth than you currently can, may be a great asset in preparing for your retirement. If so, it looks like you’ll have plenty of Roth options. The bill now goes to the U.S. Senate for approval.
