Congress is considering various changes to retirement rules. While the effort is still in flux and subject to change, the overall legislative push is shaping up to address three broad areas:
The specific legislation encapsulating this effort is called the Securing a Strong Retirement Act of 2021. Essentially, it builds on the law passed in 2019 called the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, for short. Because of the association, the shorthand for the new legislation is SECURE Act 2.0.
SECURE Act 2.0 is in the midst of consideration by various House and Senate committees. It has bipartisan support and many hope that it will come up for floor votes in both chambers by late fall. But there are scheduling challenges, given all of Congress’ legislative priorities, and consideration could slide into 2022.
“The retirement crisis in America is real and will only worsen unless we make saving easier and do more to encourage workers to begin planning for retirement earlier,” said Rep. Richard Neal, D-Mass., in a statement when the House Ways and Means Committee, which he chairs, passed the legislation.
Specifics of the legislation are obviously fluid and subject to change as various provisions are debated and negotiated. But some broad areas have emerged that individual retirement savers might want to be aware of. In many cases, they could enhance some of the rule adjustments outlined in the initial SECURE legislation. (Related: 3 points to know about the SECURE Act's retirement rule changes)
More retirement timeline flexibility
At certain points in time, retirees have to take required minimum distributions (RMDs) from their tax-deferred retirement accounts, such as 401(k)s and traditional IRAs, whether they need the funds or not. Some people, especially those who remain in the workforce or have other sources of income, would rather not draw on those funds. And, given the growing longevity of America’s population, some argue it makes more sense to let such funds continue to grow tax free for use in later years. (Related: Required minimum distributions explained)
The original SECURE Act pushed back the age at which RMDs must begin from traditional IRAs and 401(k)s to 72 from age 70½. (RMD calculator)
The new proposed legislation would push that RMD age back even further — this time to age 75. That new limit would be phased in over a number of years, under the current proposals.
Additionally, the proposed legislation would make changes to qualified longevity annuity contracts (QLACs). These are special annuities that can be bought with money from qualified retirement accounts, removing some funds from RMD requirements, so that they can be used as a source for guaranteed income in later years. (Related: Understanding the QLAC)
Currently, only the lesser of 25 percent of the aggregate account balance or $135,000 of qualified retirement funds can be used to fund a QLAC. But the new legislation would revise those limits. By how much remains to be seen. Current SECURE Act 2.0 proposals would also add more flexibility to QLACs for spousal survival rights.
Under current proposals, SECURE Act 2.0 would also remove some required minimum distribution barriers that limited the availability of life annuities in qualified retirement plans and IRAs.
More ways to catch up
The legislation also aims to help those on the verge of retirement give a boost to their retirement savings.
Workers who are at least 50 years old can make catch-up contributions to their retirement accounts. For 2021, older workers can contribute an extra $6,500 to 401(k) and 403(b) plans after reaching the $19,500 contribution limit. For those with a SIMPLE IRA, a type of retirement plan set up by a small-business owner for employees, workers can add $3,000. (Retirement planning calculator)
Under the SECURE Act 2.0 proposals, workers between the ages of 62 and 64 would be able to contribute even more to retirement accounts. Employees with 401(k) and 403(b) plans would be able to contribute up to $10,000 in catch-up contributions (an increase from the current $6,500), while participants in a SIMPLE IRA could contribute up to $5,000 (up from the current $3,000).
Additionally, under present proposals, the IRA catch-up limit for those who are 50 years old would be indexed to inflation starting in 2023. Currently, the annual increase in catch-up contribution amounts has been limited to $1,000.
Helping workers save
As it now stands legislation, as it stands, would require employers to automatically enroll eligible workers into retirement plans, such as a 401(k) or 403(b) plan, at a savings rate of 3 percent of their salary. Workers would be able to opt out or choose to save more or less, up to annual contribution limits. Worker contribution rates would automatically increase each year by 1 percent until their contribution reaches 10 percent, unless they opt out.
“One of the main reasons many Americans reach retirement age with little or no savings is that too few workers are offered an opportunity to save for retirement through their employers,” explained a House Ways and Means Committee report on the legislation. “However, even for those employees who are offered a retirement plan at work, many do not participate. But automatic enrollment in 401(k) plans — providing for people to participate in the plan unless they take the initiative to opt out — significantly increases participation.”
The legislation also would allow employers to offer immediate incentives, like gift cards, for joining a retirement plan.
And in one of the more innovative moves, the legislation proposes letting employers make matching contributions to help their workers repay student loans, much as they do for 401(k)s and other qualified retirement plans.
The House Ways and Means Committee noted that this provision is “intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans.” (Related: Handling student loan debt)
The legislation also includes provisions aimed at qualifying more part-time workers for retirement plans and helping small businesses handle costs for starting retirement plans.
In the course of debate as the legislation winds its way through Congress, various provisions and specifics could get changed or even dropped. However, in broad terms, these are the areas Congress seems set on adjusting. And it could mean opportunities for retirees and those approaching retirement. Some may want to contact a financial professional to discuss possibilities.
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