Just before Christmas, Congress decided to fund the government. As part of the $1.7 trillion omnibus spending package that was passed, the Secure Act 2.0 was tacked on. This is an update on the 2019 bill, Setting Every Community up for Retirement Enhancement Act. ¹

There is a lot tucked away in the bill… and I mean a lot. The full text is over 4,000 pages long. ²

To help distill a lot of the noise, which won't affect most people, I'm going to break some of the main topics up into two sections:
items that affect those saving for retirement, and
items that affect those near or in retirement. 

Key changes for those in or near retirement

1. Changes in the RMDs (Required Minimum Distributions) ³
   • If 72+, born 1950 or earlier, no change in RMD age
   • If 64-71, born 1951-1958, RMD starts at age 73
   • If 63, born 1959 or later, RMD starts at age 75
• The penalty for missing an RMD (or not taking enough of an RMD) is being reduced from a whopping 50% to 25%.  That’s still a painful penalty, so I still suggest working with a planner that helps verify your RMDs every year.
• Widowed spouses will be able to take RMDs based on their deceased spouse’s age which could help those in financially difficult positions.
• Removal of the Roth 401(k) RMD to now match the Roth IRA rules. Roth IRAs do not have an RMD, now Roth IRA & Roth 401(k) are aligned.
• And finally, the highly anticipated change, the new Required Minimum Distribution start ages:

Note – if you turn 72 next year, your first RMD does not need to be taken until 2024!

1. Increase in the catch-up contribution amounts.
• Next year, IRA contributions for those age 50 and over are $6,500 + an extra $1,000 for their catch-up provision. Starting January 2024, that $1,000 will be indexed to inflation, increasing every year based on federal COLA changes.
• Starting in 2025, in qualified retirement plans like 401(k)’s and 403(b)’s, workers ages 60-63 increase their contribution catch-ups from $7,500 to $10,000 or 150% of pay.
• Confusing? That’s not even the worst of it. This bill gets a little hairy at times.
2. 72(t) account rule updates
• For those who have an account with a 72(t) or 72(q) distribution, you’re used to stringent, non-flexible rules. Generally, once you start a 72(t) distribution you must keep that account for 5 years or 59 ½, whichever is longer.
• Going forward, the IRS is now allowing a 72(t) account to be split up, for example transferring one account into two different IRAs. As long as those two IRAs satisfy the 72(t) distribution, the account stays in compliance.
• This is a welcome change for quite a few people with a 72(t) account.

Key changes for those saving for retirement.

1. 401(k) - Student Loan payments
• In a much-requested amendment, congress is now allowing savers to make direct 401(k) contributions towards their student loan payments.
• If the 401(k) plan has a match, the employer match goes directly into the 401(k).
• There’s a slight issue in the bill as it stands right now, where the employee is responsible for making sure the student loan payment was actually made. It seems that the employee simply has to attest that the loan payment happened and that the employee didn’t just pocket the funds. I’m not sure how this will be corrected yet, but at least the private letter ruling can finally be adopted wide-spread.
2. Roth 401(k) Match
• Right now, all 401(k) employer matches are pre-taxed in nature and are taxable when the funds are drawn. Once the IRS clarified the payroll rules, employees will be able to elect for employer match to be Roth 401k funds.
• Employees will have to pay taxes on those contributions, effectively creating phantom income, but for those who want all money to “rothify”, this provision is a welcomed addition.
3. Missing 401(k) plan balances
• The bill includes a pathway to create a national database for old, forgotten 401(k) plan balances.
• There’s not a lot of solid information on this “401k lost and found” but hopefully it will be better than old balances escheating and going to the state, which has created taxable events in the past.

There are a lot more provisions in the bill that might peak the interests of some, such as:

• Creation of a 401k savers account
• Ability for, in some circumstances, 529 Plan rollovers to a Roth IRA. This could potentially be a great way for high-income folks to fund a Roth.
• QCDs to be indexed with a COLA, and updates to allow CRUT & CRAT contributions.
• ABLE accounts for disabled persons expanded to age 46 from 26.
• 401k Emergency Withdrawal provisions of $1,000 penalty-free once every 3 years or sooner.
• 401k withdrawals for domestic abuse victims of 50% or $10,000 from a 401k, whichever is less.
• Creation of the SEP Roth IRA and SEP Simple IRA.
• Complicated Simple IRA additional rules.

There’s more, but this is a great starting place.

1. ^{https://www.iwmfinancial.com/blog/congress-just-passed-the-biggest-retirement-bill-in-more-than-a-decade-her}
2. ^{https://www.appropriations.senate.gov/imo/media/doc/JRQ121922.PDF}
3. ^{https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/?utm_source=ActiveCampaign&utm_medium=email&utm_content=RSS%3AITEM%3ATITLE+++%5BNEV%5D&utm_campaign=NEV+Wednesday+Email}

Here's another article for your viewing pleasure posted by Barron's:

 

By Paul Brandus, MarketWatch

Dec. 28, 2022

America's workers and retirees are getting some nice year-end gifts from Washington.

As part of a bigger bill to keep the government running, Congress has passed, and President Biden has signed, something called Secure 2.0, which will make it easier for millions of Americans to stash more cash into their workplace retirement plans.

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It will also help middle and lower-income workers who may not be able to save much by providing them with a new benefit that amounts to a savings contribution—up to $1,000 per person.

Finally, it will make it easier for part-time workers to enroll in an employer's retirement plan, by requiring plans to automatically enroll workers unless they opt-out.

This last change is potentially significant, because there are some 26 million Americans who, for various reasons, only work part time. Why should retirement plans be available only to full-time workers? Last week's bill builds on 2019 legislation requiring employers with 401(k) plans to permit long-term part-time employees to join, including those with one year of service (with 1,000 hours) or three consecutive years (with 500 hours of service). Starting in 2025, the new bill will shorten this waiting period by a year—meaning part-timers will be able to enroll in their employer's plan after two years, instead of the present three.

But now let's read the fine print. Secure 2.0 automatically enrolls part-time workers in their employer's retirement plan unless they opt out—but that's only if the retirement plan is new. Existing plans do not have to automatically enroll their workers. Then there is this: many employers still don't offer retirement plans in the first place, making all of this moot for many workers—the very ones who need to be saving more for retirement.

Every nickel that workers can salt away is important, given study after study showing how little tens of millions of Americans have saved. How little? According to investment giant Vanguard, average retirement savings by age are downright scary:

It's the median column on the right that concerns me. Median means half have less and have more, meaning that half of Americans aged 55-64 have less than $89,700 in their retirement accounts. How far do you think that will go—particularly at a time of high inflation? As I've mentioned many times before, just one item alone—out of pocket healthcare costs for a couple retiring at age 65—are, according to Boston investment giant Fidelity, estimated at $315,000. So yes, making it easier for everyone to save more—or anything for that matter—is more important than ever.

Despite its limitations, I'm encouraged that in this era of political polarization, that Secure 2.0 got bipartisan support, attracting "yes" votes from opposites like Mitch McConnell, Kentucky's right-wing Republican senator, and Alexandria Ocasio-Cortez, the New York's left-wing representative. This, perhaps, could bode well for future efforts to address America's retirement crisis.

In fact, one bill aimed at building on Secure 2.0 was just introduced in Congress two weeks ago. It's also bipartisan, given that it has both Republican and Democratic sponsors in both the House and Senate. It's called the Retirement Savings for Americans Act of 2022 (RSSA), which proposes one very big change: a single retirement 401(k)-type plan run by the federal government for workers without an employer-sponsored retirement plan.

This would be a very big deal, in that it would allow millions of workers left behind by SECURE 2.0 to automatically be enrolled in a plan, allowing them to save more—or begin saving—for retirement. Workers could switch jobs without having to worry about access to a plan; assets would go into a low-fee diversified investment fund. And they would get a match in the form of a refundable tax credit, not from their employer but the federal government.

Of course, where the money would come from will be a major sticking point, given concerns about the future viability of existing programs like Social Security and Medicare. The only way to bolster them is by either raising taxes, raising eligibility ages or trimming benefits—or a painful combination of the above. Within this context, launching yet another federally-funded retirement program will likely prove to be politically difficult.

This article originally appeared on MarketWatch.

Write to editors@barrons.com

Workers and Retirees Are Getting Some Year-End Goodies From Washington—and More Could Be on the Way

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