Working through both houses of Congress currently are two bi-partisan bills that look to build upon the SECURE Act changes of 2019. The SECURE Act made several changes to retirement planning for Americans such as increasing the Required Minimum Distribution age from 70.5 to 72, removing a maximum age to contribute to a traditional IRA, requiring newly inherited IRAs to be depleted within ten years, and many additional changes. While these changes are positive, Congress is looking to expand upon them to cover more areas. There are some differences between the House and Senate bills, but both have bi-partisan support suggesting that action is on the way.
Currently, student loans are one of the major reasons young workers are not saving for retirement in their 401(k)s. Both the House and Senate plans have provisions which would allow employers to make matching contributions to employees 401(k) plans based on their student loan payments in an effort to help employees not miss out on company matches. Furthermore, the House bill would require employers to auto-enroll employees into their 401(k) plan at 3% of their gross income and increase it annually by 1% until it reaches 10%. The Senate bill does not have this provision, although it includes incentives to companies to encourage implementation of that feature.
Another interesting provision for these bills is the topic of catch-up contributions. Currently, individuals age 50 and older are allowed to contribute an extra $1,000 to their IRA every year and an extra $6,500 to their 401(k). While there are some differences on age, both the House and Senate bills would index the catch-up contributions for IRAs to inflation and increase the 401(k) catch-up contributions for those over the age of 60 to $10,000. Notably, the catch-up contributions for 401(k)s would be required to be made as Roth contributions, that is, they are made after-tax. Currently, employees can choose to make pre-tax or after-tax catch-ups contributions.
Finally, both bills look to advance the Required Minimum Distribution age to 75 by 2032. Additionally, the Senate bill would waive RMDs for those with less than $100,000 in aggregate retirement savings and reduce the penalty for failing to take an RMD from 50% to 25%.
While still early in the process, the House bill was passed by the Ways and Means Committee with unanimous support from both parties. No committee action has occurred on the Senate bill yet, but it is expected to be reviewed in the coming months. Changes are likely to occur, and the bills will have to be merged into one, but the prospect for positive changes to the retirement landscape is promising. With these proposed changes there may be changes to your personal financial plan or even business plan. As they are passed, be sure to check with your financial advisor to make sure you are taking advantage of all the changes you can.
Michael E. Scott | MBA, CFA
Senior Portfolio Analyst