By Matthew Gaude & Shawn McGuire
At the end of 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act to increase Americans’ access to tax-advantaged retirement accounts and help prevent older Americans from outliving their retirement savings.
Now, Congress is working to add new provisions and changes to existing legislation in the SECURE Act with the Securing a Strong Retirement Act of 2021 (also known as the SECURE Act 2.0). This bill includes 45 provisions as well as revenue offsets to fund itself. Below, we take a look at 8 of the most important new provisions for individuals and small business owners.
1. You Can Wait Longer to Take Your Required Minimum Distribution (RMD)
The original SECURE Act raised the age at which you must start taking required minimum distributions from traditional IRAs and 401(k)s from 70 ½ to age 72. The proposed legislation would again raise the age to begin taking RMDs, this time to age 75 over a decade. This means you could have more time for your money to grow tax deferred, but if you delay RMDs, your withdrawals may need to be larger. The age for RMDs would initially increase to 73 starting on January 1, 2022, then to age 74 on January 1, 2029. It would raise the age to 75 on January 1, 2032.
Additionally, the penalty for failing to make a mandatory withdrawal would be greatly reduced. Currently, if you fail to take your full RMD, the shortfall is hit with a 50% tax. Under the proposal, this would be reduced to 25%. If the mistake is corrected in a timely manner, the tax would be further reduced to 10%.
2. Expansion Of Automatic Enrollment In Retirement Plans
As of 2019, only 56% of American workers participated in a retirement plan. (1) A new provision in the SECURE Act 2.0 expands enrollment into employer-sponsored retirement plans by requiring employers who offer 401(k) or 403(b) plans to automatically enroll new employees, typically starting at 3% of their gross earnings and increasing 1% each year up to 10%.
Employees still have the option to opt out of enrollment if they wish, but automatic enrollment makes it more likely they will choose to participate. In fact, 90% or more of employees choose to stay enrolled when they are automatically enrolled in a plan. (2) However, some businesses, including businesses with less than 10 employees or businesses that have been established for less than three years, are exempt from this provision.
3. Increased Tax Credits For Retirement Plan Start-Up Costs
For many small business owners, the start-up and administrative costs of a retirement plan are daunting enough to prevent employers from taking action. To help cover these costs and incentivize more employers to offer retirement plans, the SECURE Act 2.0 expands the existing tax credits provision to include small businesses with up to 100 employees.
Additionally, the existing provision only provides tax credits for up to 50% of the first year capped at $5,000. With the new provision, employers would receive tax credits for up to 100% of the start-up costs in the first year with 25% reductions each year thereafter for five years. Employees would also receive tax credits for the first five years they participate in the plan, beginning with a credit of $1,000 in the first year and phasing down each year after that.
4. You Can Make Bigger Catch Up Contributions
Currently, workers who are at least 50 years old can make catch-up contributions to their retirement account. For 2021, employees can contribute an extra $6,500 to their 401(k) or 403(b) plans after hitting this year’s limit of $19,500. For a SIMPLE IRA, you can contribute
An additional $3,000.
Under the proposed bill, workers between the ages of 62 and 64 would be able to contribute additional money. For 401(k) and 403(b) plans, these employees would be able to contribute an extra $10,000 (up from the current $6,500), while participants in a SIMPLE IRA could contribute an additional $5,000 (up from the current $3,000).
The proposal also calls for IRA catch up limits for those who are 50 years old to be indexed to inflation starting in 2023. Since 2006, the annual increase in catch-up contribution amounts has been limited to $1,000.
5. You Can Earn Employer Matching Funds On Your Student Loan Payoffs
Traditionally, employers match participants’ contributions to their retirement accounts. But some workers may be unable to fund their retirement account as they prioritize paying down student loans. The proposed legislation would allow employers to make matching contributions to workers’ retirement accounts based on workers’ own student loan payments. This would apply to 401(k) plans, 403(b) plans, SIMPLE IRAs and 457(b) plans.
6. Part-Time Workers Would Have A Shorter Path To Retirement Plan Eligibility
Under the first SECURE Act, companies that offer a 401(k) plan are now required to allow employees who work at least 500 hours a year for three consecutive years to contribute to a retirement account. This proposal would reduce the three-year rule to two.
7. Saver’s in 403(b) Plans Would Get Better Investment Options
Currently, 403(b) plans can generally only invest in annuity contracts and mutual funds, preventing participants from investing in collective investment trusts. A collective investment trust is a group of pooled accounts. This lowers fees by achieving economies of scale.
The proposal would allow 403(b) custodial accounts to invest in collective investment trusts, if certain conditions are met, including the plan is subject to Employee Retirement Income Security Act of 1974, or ERISA, and the sponsor accepts fiduciary responsibility for selecting the investments participants can choose from.
8. You Can Contribute to Roth Accounts in More Ways
This may be one of the most important changes to funding retirement accounts. Currently, SIMPLE and SEP IRA’s are not allowed to accept Roth contributions from employees. The proposed legislation would change that. Additionally, employees could opt for employer matching contributions to 401(k), 457(b) and 403(b) plans to be made on a Roth basis. Currently, matching contributions must be made on a pre-tax basis. (3)
It is important to note that this is a preliminary overview of the changes from the SECURE Act 2.0 introduced in October 2020 versus the proposed legislation released in May 2021. This is one of the few areas that both Democrats and Republicans can agree on so the probabilities of additional changes to the current retirement landscape has a high percentage of being passed.
The bill recently made its way through the Ways & Means Committee and will now move to the House for vote. We will continue to keep you updated.
See How We Can Help
Although these are just a few of the expanded and new provisions to the SECURE Act, we at Live Oak Wealth Management believe the passing of this bill will result in improved retirement plan outcomes for both employers and employees. We understand that new regulations may be confusing, so we are here to help you dive deeper into the SECURE Act 2.0 so you fully understand what these changes mean for you and your business.
If you have any questions or concerns about your existing retirement plan, starting up a new retirement plan, or the SECURE Act 2.0, we invite you to call our office at 770-552-5968 or email email@example.com to see how we can help. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional. Neither APFS nor its Representatives provide tax, legal or accounting advice.