Will US Retirement Rules Shift Again?

While most chatter about potential legislation is focused on taxes, infrastructure and “stimulus,” we are tracking a new bill on a wholly separate topic circulating at the Capitol: the “Securing a Strong Retirement Act of 2021.” It passed the House Ways and Means Committee May 5 with unanimous bipartisan support and stands a reasonable chance of enactment, in our view. Now, we don’t usually comment on a bill until it is much closer to passing than this (or grabs wide attention), but we are making an exception today for one with potentially broad implications for retirees. Here is the lowdown.

The bill, colloquially dubbed the “SECURE Act 2.0,” follows and builds on 2019’s SECURE Act, updating a number of its provisions that might affect readers’ retirement planning and cash flow strategy. In broad strokes, it would:

• Raise the required minimum distribution (RMD) age to 75 over time. Congress has tweaked the rules requiring many retirees to take a minimum sum out of traditional IRAs in each of the last two years. First, the SECURE Act (version 1.0, that is) raised the age from 70.5 to 72. Then, as part of the CARES Act—the first COVID response bill—Congress suspended RMDs for 2020. RMDs are back for 2021, but SECURE Act 2.0 could change the rules again. It aims to further increase the RMD age in stages, to 73 in 2022 (if passed), 74 in 2029 and 75 in 2032. This means those with traditional IRAs and 401(k)-type accounts wouldn’t need to withdraw funds until later, letting their funds grow tax-deferred longer.
• Boost catch-up contribution limits for those nearing retirement. Workers age 50 and over can now contribute an additional $6,500 on top of the regular $19,500 annual 401(k) contribution limit. The new legislation would raise catch-up contribution limits for those ages 62 – 64 to $10,000 and index that limit to inflation. The legislation would also index the current $1,000 additional IRA contribution for those age 50 and over to inflation.
• Increase retirement savers’ tax credit threshold. Lower-income workers currently enjoy a 50% tax credit on 401(k) and IRA contributions up to $2,000 for a net $1,000 benefit. For higher earners, that falls to 20% and eventually 10% before phasing out at relatively low adjusted gross income (AGI) levels (current thresholds are $66,000 for married couples and $33,000 for individuals). The proposed bill changes this, offering a 50% tax credit for contributions up to $3,000 for couples with an AGI of up to $80,000 ($40,000 for individuals)—income levels it would also index to inflation.
• Allow employers to make matching retirement contributions for workers paying down student loans. Presently, those making student debt payments rather than retirement contributions also forgo any employer-matching retirement contributions. This provision would permit employers to match qualifying student-loan payments with contributions to the employees’ 401(k) retirement accounts.
• Mandate automatic enrollment into workplace savings plans. Employees would automatically have 3% of their pay put into 401(k)s, with that percentage rising one point annually to 10%. Workers would still be able to opt out though and decide for themselves whether they can afford to defer that much.
• Raise the qualified charitable distribution (QCD) limit to $130,000. Presently, the QCD limit is $100,000. Raising this would also up the amount of donations retirees can count toward satisfying their annual RMDs.

In our view, most of this would likely help folks save for and fund retirement, which is generally fine. There are a couple other potential changes worth being aware of that build on the SECURE Act’s dubious annuity provisions. But none of these are hugely negative or mandated.

Of course, this bill is very far from law. Its provisions could change. Some—or all—of it might never see the light of day. A full House vote isn’t yet scheduled. Then, if and when it passes the House, the Senate would still need to approve it. The Senate may also mark it up with changes. If so, it would go back to the House to reconcile the differences before heading to the president’s desk. Retirement investors will have a good while to see what the SECURE Act 2.0 entails before it becomes law, if it ever makes it that far.

To us, this is worth tracking as it wends its way through Congress. It could affect how you save for retirement and harness the power of compound growth.