It’s Jason de Bono, President of NuView Trust Company.
Today, let’s look at the latest Secure Act 2.0 update, and the potential impact these legislative changes could have on IRAs and retirement accounts.
Throughout the course of the year, we monitor and listen closely to any activity that may result in favorable – or sometimes unfavorable – legislation being proposed.
Today’s legislative updates relate to the Secure Act 2.0, which is a follow-on to the Secure Act passed in 2019. The Secure Act was an acronym for setting every community up for retirement.
The good news is that the Secure Act 2.0 passed in the house with overwhelming bipartisan support of 415 to 5 votes.
What’s Next For The Secure Act 2.0?
Now, this popular legislation’s passing was only through the House. This means that it still has to work its way through the Senate, and many of the things we’re going to talk about today are simply proposed – and can change.
However, generally when we see this overwhelming bipartisan support, the changes tend to be nominal, although anything can happen.
Let’s Break Down Some of The Changes
Here are a few of the changes being proposed.
401K and 403B Employer Plans
Let’s start with areas that involve 401k’s and or 403b’s. These are typically retirement accounts set up through employer plans to encourage individual employees to save for retirement.
The first area of proposed change is in automatic enrollment. This means that as individuals become eligible for their employers 401k, or 403b plan, they’ll automatically be enrolled at a rate of 3%.
Now this minor withdrawal from their paycheck will go to a retirement savings vehicle.
And hopefully, the vehicle allows them to have more money and execute a better retirement.
For those who may not have the money, or may not necessarily have the desire, they can simply opt out of the employer plan.
For those who don’t, they’ll remain in automatic enrollment, and their contribution limit will increase by a percentage each year up to 10%.
10% is considered a standard positive rate for saving for retirement. However, at any point through the process, they can opt-out or stop the additional increase on an annual basis.
Contributions Toward Student Debt
Another thing that is really aimed at helping younger investors into retirement savings is a provision that would allow an employer to make matching contributions to a 401k plan against student loan payments.
A recent college graduate, potentially carrying student debt, may be forced to make a tough decision to either pay down debt or contribute to their 401k.
What’s nice about this proposed piece of legislation is if they choose to pay down their student debt, they can still take advantage of their employer who offers a payroll match or a contribution match against those student loan payments.
Increased Contribution Limits When Closer to Retirement
Other possible changes focus on the way that individuals save as they get closer to retirement.
So, from a catch-up provision, which currently sits for individuals over the age of 50, there’s a couple of proposed changes.
- There are proposed changes to increase the limits for those that are over 50 across the board, which is great.
- They’re also looking to make catch-up contributions, which is defined as those contributions only available to those over 50 or older. Essentially, they’re proposing that those contributions automatically go into a Roth deferral acct, as opposed to pre-tax.
- In addition, the Fed loves the idea of Roth accounts, because it produces money into the treasury from a tax standpoint up front.
So, there is some interesting legislation on the table that we need to take a closer look at as the Secure Act 2.0 gets through the Senate.
Roth Eligibility For Both Employer And Employee Plan Deferrals
Another great provision of Roth accounts is that they’re looking to extend Roth contribution and eligibility into both the employee deferral – inside SEP and Simple IRAs – as well as the employer deferral.
So, those current enrolled in a Simple IRA or SEP IRA, all of those plans – both employee and employer deferrals – are being done at a pre-tax level.
Increased Age Limit For Required Minimum Distributions
Another provision for individuals getting closer to retirement is another extension of required minimum distribution timing.
In the original Secure Act passed in 2019, they raised the RMD age (Required Minimum Distributions) from 70½ to 72. Secure Act 2.0 furthers that from 72 to 73, with a gradual increase over time, potentially up to 75.
What this means is that you may not be forced to take money out of your retirement account as quickly as you would be under the previous Act. This allows you to continue to generate tax deferred wealth for a longer period of time.
Potential Reduced Penalties For Prohibited Transactions
While there are a lot of other smaller provisions that may be impactful, we’ll hold off on discussing some of those until we get more detail.
With that said, we’ll wrap up this post with one that is a very unique provision. It relates to self-directed retirement accounts, and it involves a reduced penalty for prohibited transactions.
Again, not all the details are crystal clear. But, what’s been proposed is actually eliminating the entire account penalty and distribution that may occur if a prohibited transaction is deemed inside a retirement account. Instead, any penalty and distributions would be limited only to the area or investment that had a prohibited transaction.
While we’re certainly not encouraging clients to tow the line or push the envelope, we understand at times there may be transactions that have a little ambiguity from a rule perspective.
So, this provision is an exciting one because it says to individual investors that they want you to go out and be creative. They want you to use all the availability that self-direction offers.
And if you do run afoul of the rules, the penalties may not be as egregious as they had been previously. So, there’s more to come before we finalize any opinions on what the provision involves specifically. The good news is it’s made it through the house, and it’s found its way to the Senate.
Things Could Change
Like any legislation that’s not signed into law, there’s always lots of things that can change.
The great news here is that all of the provisions – that appear to be on the table – look very good from an IRA standpoint. And they are very favorable to the self-directed IRA industry, which we’re excited to see.
At NuView Trust Company, we will continue to monitor this Act through the Senate, and we’ll continue to monitor it until it’s potentially passed into law, and it’s signed by the President.
Now, there’s no timetable on these events. We’ll just have to keep a close eye on it, and we’ll continue to keep you posted.
Stay tuned and continue to follow NuView Trust on our social media channels – including YouTube – so that you can be updated as we get this information.
We appreciate you tuning in and trusting NuView for not only your self-directed retirement account custodian services, but also for information and staying updated with all the rules, regulations and opportunities that self-directed IRAs and retirement accounts provide.
If you have any questions about the Secure Act 2.0 updates above, we’d be happy to speak with you.
Just give us a call at (407) 708-1853 or email: IRASpecialist@nuviewtrust.com.
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