The Secure Act 2.0 is a piece of legislation that may help Baby Boomers optimize their retirement savings plans in several ways.
The House of Representatives recently passed The Securing a Strong Retirement Act of 2022, also known as the “Secure Act 2.0,” or, simply, "Secure 2." If the Senate passes it, Baby Boomers may see significant changes to certain retirement rules that could be beneficial to optimizing their retirement plans.
Expanding on the 2019 Secure Act
Secure Act 2.0 expands on the changes to retirement benefits started by the Secure Act, which was enacted in 2019 during the Trump administration. The Secure Act increased the availability of Multiple Employer Plans, provided tax credits to small businesses who start a retirement accounts for their employees, expanded coverage to include part-time employees and raised the required minimum distribution age from 70.5 to 72. Secure Act 2.0 would build upon those changes.
What do Baby Boomers need to know about Secure Act 2.0?
In its current incarnation, Secure Act 2.0 includes several provisions Baby Boomers can utilize either when preparing for retirement or during their retirement. Some of the most relevant provisions for Baby Boomers include:
- Increased age for required minimum distributions (RMDs). The age for RMDs would increase from 72 to 75. This increase gets phased in over the course of a decade and is based on your age. As it stands with the proposed increase phases, RMDs would begin at age:
- 73 starting in 2022
- 74 starting in 2029
- 75 starting in 2032
- Reduced penalties for not taking out an RMD. Currently, the penalty stands at 50% for a failure to take mandatory distributions. Under the proposed rules, the penalty would be cut down to 25%. Additionally, if the issue is resolved quickly, the penalty is cut down to 10%.
- Expanded automatic enrollment. Employers would be required to enroll their employees into 401(k)savings plans automatically. In an effort to help new businesses, any business less than 3 years old would be exempt from this requirement.
- Increased catch-up contribution limitations. To help those nearing retirement, Secure Act 2.0 would increase the amount some participants can contribute to their IRA accounts. Currently, the catch-up limit for Roth contributions is $6,500 per year. The law would allow those who are 62, 63, or 64 years of age to contribute up to $10,000 per year. This limit would also change annually to account for cost of living.
- Decreased requirements for part-time workers. Currently, part-time workers at least 21 years of age can contribute to a 401(k), provided they work at least 500 hours for each of three consecutive 12-year periods. The new act would reduce this to 500 hours during each of two consecutive 12-month periods. This could help those Boomers who work part-time jobs contribute an extra year's worth of savings to their retirement fund.
- Deferred taxes on S corporation stock sales to an ESOP. Owners of C corporation stock can already qualify for income tax deferrals on gains derived from selling the stock to an ESOP, or Employee Stock Ownership Plan, if they use those gains to purchase qualified replacement property. The new provision to expand these deferrals to those who sell S corporation stock to an ESOP, allowing the to defer taxes on 10% of their gains.
Now, the fate of Secure Act 2.0 sits with the Senate—which has a few proposals of their own that may or may not create additional changes to the House bill. Regardless, we should know the fate of Secure 2.0 by the midterms.
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