Personal Finance: Securing a Strong Retirement Act of 2020

[BamaNation]

Washington aims to pass SECURE Act 2.0 with more changes to the retirement system

As the 116th Congress winds down, Capitol Hill is gridlocked on pretty much every issue but there is hope of bipartisan compromise on the issue of retirement.

finance.yahoo.com

Ignoring the obvious political positioning & social engineering aspects in this potential bill (which really shouldn't be discussed in this forum) I'm going to highlight some of the concepts. I won't pretend to understand or predict the consequences or the consequences of consequences (i.e. indirect & follow-on effects) of all the provisions provided in the bill, but on the whole I do really like some of the proposed changes. The bill appears to have bi-partisan support at least at some level.

As always, if your current 401k (or other plan) doesn't provide you the best possible opportunity to easily save for retirement at low expense, you should advocate for changes for a better 401k plan and/or provider.

The following is my summary of the current bill proposed in the House and is provided w/o comment (in this post) but with some links to various resources to learn more about the particular item outside the actual bill.


H.R. Act: (unnumbered as of 11/17/20) Securing a Strong Retirement Act of 2020
Summary points of the 2020 proposed bill: Securing a Strong Retirement Act of 2020 ... proposed changes to retirement plans

• Automatic enrollmentin a retirement account (employees are able to opt out)
  • Initial auto amount is 3%-10% of earnings
  • Auto amount would increase 1% each year until 10% is reached
• Simplification of Saver's Credit legislation
• 403b changes
  • Enhanced 403b plans & changes related to 403b availability for investing in certain collective investment trusts (similar to 401a plans)
  • Multiple employer 403b plans (small biz could band together to offer 403b plans similar to 401k change last year)
• Changes related to tax deferral treatment for ESOP plans of S-corps.
• Changes to catchup limits on IRAs
  • Indexing to inflation the IRA contribution catchup limits over age 50.
  • Additional indexed to inflation IRA contribution limit for over age 60.
• Student loan payments treated as elective deferral for purpose of matching contributions
• Reduction to 2-years the service requirement before participating in 401k for long-term, part-time employees
• Small business startup credits for pension plans
• RMD Changes
  • Increase RMD requirement age to 75
  • Removal of RMD for life annuities
  • Exemption from some RMD rules for accounts >$100K
• Expansions of IRA qualified charitable distribution provisions
• Other changes, corrections, protections and process modifications
  • Change in gov't pension plan provisions and plan offerings
  • Better protection for retirees in recovery of overpayments by plans
  • Creation of a retirement account "lost and found" database clearinghouse to help employees who have changed jobs, moved, or whose previous company moved, changed name, merged, etc.
  • Encouraging state-level IRA plan participation for those who move around.
  • Several other "process" simplifications and unnecessary record-keeping or notification requirements
  • Several corrections to the SECURE ACT OF 2019

H.R. 1994 - SECURE ACT of 2019: Investopedia review of the SECURE Act of 2019
Investopedia Summary: "The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, which originally passed the House in July 2019, was approved by the Senate on Dec.19, 2019, as part of an end-of-year appropriations act and accompanying tax measure, and signed into law on Dec. 20 by President Donald Trump."

5/23/19: Passed US House of Reps 417-3 .
12/19/19: Approved by US Senate as part of larger package.
12/20/19: Signed into law by President Trump.

• Easier for small biz to offer 401k plans
• Able to have collective / multi-employer plans (ie. small biz in same strip mall could band together & offer a 401k plan with cheaper expenses)
• Removed max age limits on retirement contributions
• Penalty-free w/d at birth/adoption of child
• Penalty-free w/d up to $10k for repayment of student loans
• Easier for part-time employees to participate in retirement plans
• Raised RMD age to 72
• Mandates that most non spouses who inherit IRAs must must take all RMDs within 10 years
• ... and a few other "minor" things

 

[mdb-tpet]

Interesting. Politics aside as much as feasible, what do you see as benefiting the business/high earner more vs. benefiting the average employee/taxpayer more?

 

[BamaNation]

Interesting. Politics aside as much as feasible, what do you see as benefiting the business/high earner more vs. benefiting the average employee/taxpayer more?

Not sure what there's not to like if you're an "average employee/taxpayer" but here are some points that I would highlight:

• The auto saving should definitely benefit "average" earners.
• The RMD changes should benefit "average" earners who are higher-than-average savers.
• The ability of small businesses to join together to offer 401k plans should benefit everybody but particularly those who work for and own small businesses.
• The ability of part-timers to save in a 401k earlier will definitely benefit "average" earners
• The ability to treat some student loan payments as a "contribution" for 401k contributions under the auto-saving should definitely benefit "average" earners
• 403b changes will definitely benefit "average employees/taxpayers" since many are healthcare workers (i.e. staff, nurses, etc.) and school & other government employees.

"Taxpayers whose incomes are in the bottom 90 percent of all incomes pay, on average, more in payroll (SSI) taxes than in income taxes." - TaxFoundation.org

People who are forced to save through 401k contributions should be in much better shape if since they're not buying bling-bling with those funds. I know I wish I had been forced to save up to 10% early in my career and I would definitely have called myself an "average employee/taxpayer" for much of that early period of time. Had I been forced to save then, I would probably be retired now.

Aside from the above, I'm sure there are many benefits to small businesses and certainly some higher earners will benefit - especially if they max out all of their opportunities for tax-advantaged saving. Relatively very few do that but they're also the ones paying the bulk of income taxes so obviously they benefit when saving through tax-advantaged plans rather than buying even more shiny bling-blings.

 

[Bamaro]

Rather than just delaying RMDs I wish they would decrease the rate required.

 

[BamaNation]

Rather than just delaying RMDs I wish they would decrease the rate required.

Even better: eliminate RMDs altogether

 

[BamaNation]

Probably a good time to provide a small refresher on RMD's.

Here's a quick calculator from Schwab.com for calculating your RMD.

Bogleheads has a good wiki page about them: "The amount of your RMD is equal to your retirement account balance as of December 31 of the previous year (adjusted for any outstanding rollovers, asset transfers, or conversions completed during the prior year that are recharacterized in the current one) divided by your life expectancy factor according to the appropriate IRA distribution table in IRS Publication 590-B. Calculations for different scenarios are described below. "

IRS.gov: "Individuals can use online worksheets on IRS.gov to figure the RMD. The worksheets can also be found in the Appendices to Publication 590-B. "

From smartasset.org: "RMDs apply to the following retirement plans:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• Rollover IRAs
• Most 401(k) and 403(b) plans
• Most small business accounts

... To calculate your RMD, start by visiting the IRS website and access IRS Publication 590. This document has the RMD tables ... that you will use to calculate your RMD. Then, take the following steps:

• Locate your age on the IRS Uniform Lifetime Table
• Find the “life expectancy factor” that corresponds to your age
• Divide your retirement account balance as of December 31 of the previous year by your current life expectancy factor"

The financial institution where you have a retirement plan should send out a letter in January of each year specifying how much RMD is for that account. If you have multiple retirement accounts that are subject to RMDs (see above), you'll need to take RMDs out of each one. Make sure you've included everything with a balance as of Dec 31.