On March 29th, 2022, the House of Representatives passed the Securing a Strong Retirement Act of 2022, known as Secure Act 2.0. This bill now moves to the Senate, who will mark up and pass their own version in the coming months. Passage of the final bill likely wouldn’t occur until late this year. So what’s in this version of the Secure Act? We’ll highlight the top five takeaways for our retired clients and those nearing retirement.
From 72 to 75 – In 2019 in the original Secure Act, Congress raised the age limit that IRA owners must begin Required Minimum Distributions (RMDs) from 70.5—which was always a bit confusing—to age 72. In Secure Act 2.0, the House version, this age limit is scheduled to rise again, but in stages. As proposed, it would move to age 73 next year (2023), then to 74 in 2030, and finally hit 75 in 2033. Having the age of RMDs pushed back can be beneficial if planned for appropriately. Just to clarify, this doesn’t mean you can’t take money out until these ages, but rather the IRS doesn’t force you to take money out prior to these ages. Our rockstar team here at P&A tracks your RMDs for accounts we manage so you don’t have to, as these proposed rules will no doubt sow some confusion.
RMD penalties are halved – Secure Act 2.0 as written would reduce the egregious 50% penalty on the amount of an RMD missed to “only” 25%, which is still one of the steeper penalties around. If the RMD is made up in a timely fashion, the penalty will be reduced to 10%. As tax expert Ed Slott points out in this article, “most people don’t pay this penalty, because the IRS will usually waive it if the missed RMD is made upon discovery, and Form 5329 is filed.”
Catch up contributions increasing but must be done with after-tax dollars – While the House is increasing the amount people over the age of 50 can contribute to their employer retirement plans, they are requiring these catch-up contributions to be made in Roth form, i.e. with after-tax dollars. Apparently, the U.S. government doesn’t want to defer more income.
Matching contributions can be Roth – Currently, when an employer matches an employee’s retirement plan contribution, they do so with pre-tax dollars. Under the House plan, employers and employees would have the option to make these matching contributions in Roth form using after-tax dollars.
SIMPLE & SEP-IRAs would be able to accept Roth employee contributions – Furthering the “Rothification” theme—hat tip to tax expert Ed Slott for coining this phrase–under the House version, employees would be able to direct their SIMPLE and SEP-IRA contributions into a Roth account instead of only pre-tax contributions as the current law stands.
This post merely scratches the surface of what’s included in 2.0. Because the Senate will offer up their own version and there will be a reconciliation bill, expect changes to occur and perhaps some of the above not to come to fruition. Such is the sausage-making process of Congressional bills. Expect more from this blog during the year on Secure Act 2.0.
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