SECURE 2.0: More Changes Coming to the Retirement System
Bills are in the early stages, but these are the main proposals: Changes to RMDs, contribution limits, student loan debt, and part time worker eligibility for 401Ks.
Two years ago, the Secure Act, signed by President Trump made the first changes to the retirement system in a long time. Now, what politicians and pundits are calling Secure 2.0, more changes are on the way…
Two bills in congress, one in the House, one in the Senate, are set to build upon the previous version. The goal is to increase retirement security for millions of Americans- and although the bills are early on in the legislative process, we can access the main areas politicians are taking aim at.
Called the Securing a Strong Retirement Act — and nicknamed “Secure 2.0” — the House bill received unanimous approval last month from the Ways and Means Committee. The Senate bill — called the Retirement Security and Savings Act has not yet received committee attention but is expected to next month.
Student Loan Debt and Retirement Savings
For those saddled with student loans and don’t contribute to a 401K because of them- Both the House and Senate measures would enable employers to make contributions to 401(k) plans (and similar workplace plans) on behalf of employees who are making student loan payments instead of contributing to their retirement plan.
So workers would still receive a company match on a student loan payment, not just a 401K contribution.
Capital Gains Tax
The plan proposes to increase the capital gains and dividend tax rates for taxpayers with incomes of $1 million and over to 43.4%, which includes the 39.6% income tax plus the investment income surtax of 3.8%. This is huge for high-earning taxpayers, as it would be a large increase to the federal tax currently imposed (23.8%) on long-term capital gains. In addition, the average top state capital gains rate is roughly 5.2%. In total, the combined federal and average state tax rate on capital gains for wealthy individuals would be 48.6% under the plan.
(Forbes.com)
Stepped-Up Basis
For those who are expecting a large inheritance, this proposal is important. President Biden is set on closing the “trust-fund loophole” and changing how capital assets are taxed when a person passes away. This change would eliminate the “stepped-up basis” rule, which now allows heirs to step up their cost basis in the inherited property to match the value on the date of the previous owner’s death. In layman’s terms, “many wealthy Americans will no longer be able to pass stocks, real estate, and other capital assets to their heirs when they die without paying capital gains tax,” according to Kiplinger.
In March, Sen. Chris Van Hollen, along with Warren, Sanders and others, introduced the Sensible Taxation and Equity Promotion (STEP) Act to achieve this by taxing unrealized capital gains in situations in which people inherit fortunes the initial owner did not pay income taxes on. To ensure this only affects wealthy families, the bill would allow individuals to exclude $1 million in unrealized capital gains from this tax.
(Forbes.com)
Catch-up Contributions
Currently, retirement savers age 50 or older to make so-called catch-up contributions to their retirement savings on top of the standard annual contribution limit. For 2021, this is $19,500 for 401(k) plans and $6,000 for individual retirement accounts. The now the catch up limit to $6,500 for a 401K or $1,000 for an IRA.
The House bill would adjust annual catch-up amounts based on inflation, and would expand the 401(k) catch-up to $10,000 for individuals who are age 62, 63 or 64. Workers enrolled in so-called SIMPLE plans would be allowed $5,000 in catch-up contributions, up from the current $3,000.
It would also change the tax aspect of catch-up amounts as a way to offset any revenue losses from other provisions. That is, all catch-up contributions to 401(k) plans and the like would be treated as Roth contributions — i.e., after tax — starting next year. Current law allows workers to choose whether to make those contributions on a pretax or Roth basis (assuming their company gives them the choice).
Additionally, matching contributions from employers currently can only be made to pretax accounts. A provision in the House bill would allow them to be post-tax (Roth) contributions if the employee wanted to go that route.
The Senate bill also would index the IRA amount to inflation, but would apply to people age 60 or older.
(CNBC.com).
Required Minimum Distributions (RMDs)
The Secure Act already changed when required minimum distributions, or RMDs, from retirement accounts must begin to age 72, from 70½. Under the new House bill, those mandated annual withdrawals wouldn’t have to start until age 73 in 2022, and then age 74 in 2029 and age 75 by 2032.
Similarly, the Senate bill would raise the RMD age to 75 by 2032. It also would waive RMDs for individuals with less than $100,000 in aggregate retirement savings, as well as reduce the penalty for failing to take RMDs to 25% from the current 50%.
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