Patrick Horning is a senior director of Advanced Planning at Northwestern Mutual.
Lawmakers are working on legislation to make saving for retirement easier. The House of Representatives recently passed the Securing a Strong Retirement Act of 2022, or SECURE Act 2.0, which expands on the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was signed into law in 2019. These proposals aim to encourage people to save more for retirement by making the process of contributing to and withdrawing from retirement savings plans easier.
The bill now moves to the Senate. Although it appears to enjoy broad bipartisan support, the Senate may not begin debating the legislation until later in the year. The bill includes a number of provisions but here’s what you should know about how some of the key proposed changes may affect you.
Automatic enrollment increased
The proposed legislation encourages more people to save for retirement by requiring many employers to automatically enroll employees in the company’s retirement plan. Employees who do not wish to enroll would be required to opt out. The automatic enrollment amount would be set to at least 3 percent of the employee’s salary and increase annually until the employee’s contribution reaches 10 percent.
Required minimum distribution age raised
The SECURE Act delayed the date most taxpayers are required to start taking required minimum distributions (RMDs) from their qualified retirement plans and IRAs from age 70½ to age 72. The proposed legislation would up this further until age 75, giving people more time to let their tax-deferred retirement funds grow.
While this is a positive move, the implementation could be confusing as the change would be phased in. This means the required beginning date would be different for those born before 1950, those born in 1951 through 1956, in 1957 through 1958, and in or after 1959. These differing ages could help keep qualified plan attorneys fully employed for the foreseeable future.
Catch-up contribution limits boosted
Currently, people who are 50 and older can contribute additional amounts to their qualified retirement plan. These “catch-up” contributions would be increased to $10,000 per year for those aged 62-64. Since employees are typically in their highest earning years right before retirement, many people can defer additional amounts when they may least need the current funds.
The catch-up contribution amount for individual retirement accounts (IRAs) is set at $1,000 and does not adjust for inflation. The proposed legislation would index the IRA catch-up contribution for inflation.
Expanded Roth contributions
Roth contributions would be expanded. Currently, SIMPLE IRA and Simplified Employee Pension (SEP)-IRA contributions and employer matching contributions to qualified plans must be made with pre-tax dollars. Under the legislation, Roth contributions could be made to both SIMPLE and SEP-IRAs, and employer matching contributions to a qualified retirement plan could be made to a Roth account. The ability for taxpayers to decide whether they want to fund any or all their retirement accounts with pre-tax or Roth contributions is a definite positive.
Unseen tax implication
Overall, the SECURE Act 2.0 contains a number of positive provisions to encourage taxpayers to save more for retirement. But there is some not-so-good news to consider: The mandatory Roth treatment for qualified plan catch-up contributions could be an unseen tax for high-income earners.
Whenever Congress provides incentives to save for retirement, they are delaying the tax revenue that this income would otherwise generate. Congress typically adds something to generate revenue to offset that delay in collecting income tax. Here, Congress would require that all qualified retirement plan (not IRA) catch-up contributions for those age 50 and older be placed into a Roth account. This sounds like a good idea since distributions and earnings on the Roth account are income-tax-free as long as you’re 59½ or older and have owned your Roth account for at least five years. However, Roth contributions are currently made post-tax.
Taxpayers over age 50 who make catch-up contributions to their retirement accounts are able to do so since they are often in their highest earning years. This can serve a dual purpose of helping to reduce taxable income during these high-earning years. Once they have retired, many people are in lower income tax brackets. So, Congress would tax the catch-up contributions at a higher rate today and let it come out income-tax-free when the taxpayer is in a lower bracket. The proposal that catch-up contributions be placed into a Roth account is nothing more than a revenue raiser for Congress.
This publication is not intended as legal or tax advice. This information is intended solely for the information and education of Northwestern Mutual financial representatives, their customers, and the legal and tax advisors with whom they work. It must not be used as a basis for legal or tax advice and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its Financial Representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent tax advisor. Tax and other planning developments after the original date of publication may affect these discussions.
As an attorney in Sophisticated Planning Strategies, I work with Northwestern Mutual financial advisors as they help clients achieve financial security.
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