With all of the fanfare associated with the big climate bill, (the Inflation Reduction Act or “IRA”), you may have missed potential changes coming to the original IRA.
When they return from summer break, lawmakers will get busy on the 2022 addendum to the December 2019 Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”).
That law made big changes to retirement plans, like increasing the age at which you are required to withdraw money from tax-deferred retirement accounts (the Required Minimum Distribution age is 72 as of December 31, 2019), removing the age cap for traditional IRA contributions, and elimination of “Stretch” RMDs, which allowed non-spouse beneficiaries of IRAs to take distributions from an inherited retirement account over their own lifetimes.
Lawmakers are now seeking to beef up the SECURE Act with additional measures.
The House passed the Securing a Strong Retirement Act of 2022 (H.R.2954 or “Secure 2.0”), on March 29th with overwhelming support (414-5). The Senate followed up with two different versions, the “Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg Act” (RISE & SHINE Act) and the “Enhancing American Retirement Now Act” (EARN Act), which together will form the Senate’s Secure Act 2.0 package.
While the House and Senate versions differ in the details, both would expand retirement savings for workers. For older workers, the plans would accelerate catch up contributions into retirement plans.
Currently, those over 50 years old can contribute an extra $6,500 annually. Both bills would increase that limit to $10,000 beginning in 2024, with the House bill applying the new limit only to those who are ages 62, 63 or 64, and the Senate version would be for ages 60, 61, 62 or 63.
Additionally, both would require that any catch up-contributions for those over age 50 be made as Roth contributions and would allow employees to have employer matching contributions made as Roth contributions.
For IRA catch-up contributions, currently at $1,000, both bills would index the limit to inflation, though the start date is different for each.
When it comes to taking money out of a pre-tax retirement plan, both versions would delay the first RMD year to age 75, though the House bill phases in the change, while the Senate bill goes directly to 75.
Thankfully, both bills would ease the burden for those who do NOT take their RMDs — the penalty would drop from 50 to 25%, and if the error is corrected in a timely manner, it would be 10%.
For those retirees who are using Qualified Charitable Distributions, which allow direct grants of up to $100,000 per person, per year from an IRA directly to an eligible charity, there is room for more giving. Both bills would index the $100,000 limit for inflation.
To increase participation in retirement plans for current workers, the House version would automatically enroll participants into company-sponsored retirement plans, starting at 3% of salary, and gradually increasing that amount to 10% .
Small (fewer than 10 employees) and newly formed companies (less than 3 years old) would be excluded. While the Senate version does not mandate auto enrollment, it would require auto-enrolling plans to check, every three years, whether workers who initially opted out have changed their minds.
Both plans would also make it easier for part-time workers to become eligible for their company’s 401(k) and would extend the “Saver’s Credit,” a federal tax credit for mid- and low-income taxpayers who contribute to an IRA or company plan.
I’ll keep an eye on the process and report back when a final deal is complete.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected] Check her website at www.jillonmoney.com.