The Retirement “Secure” Act 2.0!

If you’re familiar with the original Setting Every Community Up for Retirement Enhancement (SECURE) Act, you know that this legislation was passed in late December 2019.In theory, the intent was to make it easier and less expensive for small business owners to set up and administer retirement plans. In practice, it increased the required minimum distribution (RMD) age to 72. It also eliminated the Stretch IRA, a pretty significant hit from a beneficiary standpoint that requires those who inherit retirement accounts to remove all the funds within 10 years instead of over their entire lifetime.

Now, the folks in Washington are looking at changing the rules once again. They’re calling it the Securing a Strong Retirement (SSRA) Act of 2021, or SECURE 2.0. Ultimately, this latest proposed legislation could make some significant changes to your retirement. Find out how this could affect you so you know what to expect as you near retirement age.

SECURE 2.0 Raises the Required Minimum Distribution Age—Again

The original SECURE Act already raised the RMD age from 70.5 to 72. Now, SECURE 2.0 proposes increasing the age from 72 to 75 gradually over the next few years. Here’s the timetable to keep in mind:

  • On January 1, 2022, the RMD age will increase to 73.
  • On January 1, 2029, the RMD age will increase to 74.
  • On January 1, 2032, the RMD age will increase to 75.

This is all well and good, but it plays into the assumption that a sea of people only take money out of their retirement accounts because they have to. But that’s not the reality of it. For most people, increasing the required minimum distribution age is immaterial. After all, well over 80% of retired people use their RMDs to create monthly cash flow for themselves. They’re retired, so it’s logical for them to take out the money they’ve saved all their lives to enjoy their retirement.

Here’s something else to think about. Let’s say you continue putting off your required minimum distribution. Maybe you don’t want to pay taxes until the last possible moment, and you don’t actually need the money from your retirement account—unlikely, but we’ll go there. This continues to allow your funds to build up tax-deferred. By not taking money out bit by bit along the way, all you’re doing is increasing your future RMDs.

The other thing to remember is that SECURE Act 1.0 eliminated Stretch IRAs. So the more your account builds by putting off your RMDs, the bigger tax problem you’ll create for your beneficiaries who must empty any inherited retirement accounts within 10 years.

At the end of the day, the SECURE Act and SECURE 2.0 don’t make your retirement more “secure” at all. It’s simply a case of Washington giving and then taking away. No amount of legislation will ever make your retirement better—you have to take personal responsibility to save and invest and diversify.

SECURE 2.0 Expands Auto-Enrollment for Employer-Sponsored Retirement Plans

The folks in Washington want to automatically enroll eligible employees in 401(k), 403(b), or other employer-sponsored plans. Contributions typically begin around 3%, increasing by 1% every year up to a maximum of 10%. This provision is essentially a forced saving mechanism that steps in when people don’t take personal responsibility to enroll or set aside money for retirement themselves. We’re not against it, but it doesn’t get to the heart of the societal problem underneath.

SECURE 2.0 Increases Catch-up Contribution Limits

The current law states that if you’re over age 50, you can put an extra $1,000 into an IRA or Roth IRA per year. Starting in 2023, catch-up contributions will be indexed for inflation. This ultimately allows you to put in more money and raise the $1,000 limit along the way.

The proposed changes for 401(k) and 403(b) plans are a little odd. As of now, you can put in an extra $6,500 per year if you’re over age 50. SECURE 2.0 would increase this catch-up contribution amount to $10,000—but only at ages 62, 63, and 64. This is quite a confusing mechanism that probably won’t make much of a difference for someone retiring in less than 15 years anyway.

The fine print under these changes is really about revenue. The folks in Washington are spending money at unprecedented rates, and at some point, they have to figure out the revenue side. For the government, revenue means taxes—how they collect them and when.

Because the government needs money now, SECURE 2.0 requires people to make catch-up contributions on a Roth—or after-tax—basis. As a result, you pay taxes on contributions now and enjoy tax-free distributions later. This provision is the most disturbing to us because it prevents people from choosing which contribution style is right for them.

Signs That Your Retirement is on Track

Do you know how to tell whether your retirement is in good shape? If you’re getting close to that age, we hope you can check all of these boxes:

  • You have less debt than you had a year ago.
  • You feel comfortable with the 4% rule, which states that you should withdraw no more than 4% of the value of your retirement account in the first year after you stop working. As a result, your portfolio should last you at least 30 years.
  • You’re thoughtful about how you use your cash. For example, did you spend your economic stimulus checks because you needed the money? If you were able to save them instead, this signals that you’re in better financial shape.
  • You have adequate emergency savings.
  • You have open and honest conversations with financial professionals about your investment options.
  • Your investments survived the market fluctuations that have occurred since the pandemic began.
  • You conduct a money checkup every year. This includes assessing money in vs. money out, your investment allocations, and your overall financial picture. Take the opportunity to rebalance your accounts if necessary.

Whether you’re nearing retirement age or need help setting up an investment account, feel free to call Nelson Financial Planning at 407-629-6477 to ask questions. You can also contact us online to schedule a free consultation with a certified financial fiduciary. We’re always here to help.