Signed into law in December 2019, the
In 2022, the U.S. House of Representatives overwhelmingly passed a successor bill, commonly referred to as the SECURE 2.0 Act, that could advance these goals further if passed by the Senate and signed by President Biden.
Major elements of the SECURE Act
The original SECURE Act, much of which took effect in January 2020, modified the tax code—affecting everyone from new parents to those who inherit
1. Age increase for required minimum distributions
Older adults who own a workplace retirement plan—including 401(k)s and 403(b)s—as well as traditional IRAs still have to take
2. No more age limit for IRA contributions
Prior to this act, retirement savers had to stop making contributions to an IRA when they reached age 70½. Since the law's passage, you can continue to put money into your account beyond that age as long as you continue generating earned income through work. Along with the delayed RMD, that amendment provides an opportunity for older adults to further build up retirement assets before making withdrawals.
3. Graduate students can use IRAs
The legislation also cast a larger net regarding who can contribute to an IRA. One requirement to invest through these accounts is that you have earned income. Stipends and fellowship awards for students previously didn't count, but the SECURE Act relaxed that rule to
4. New parents can easily make withdrawals
Normally, savers face a 10% early withdrawal penalty when they pull money from a workplace plan before reaching age 59½. But there are several exceptions to that rule, and the SECURE Act added another one: welcoming a new child into your family. The law makes it possible for
To qualify for this carve-out, the distribution has to take place within one year of the child's birth or adoption. It's important to note that parents still have to pay ordinary income tax on any amount that they withdraw. Depleting your retirement account early should be considered a last resort. Still, it's an opportunity for parents to get some reprieve from the financial responsibilities of having a
5. More part-time employees qualify for 401(k)s
Thanks to the passing of this act in 2019, more part-time employees gained the ability to contribute to workplace retirement plans. Before, workers needed to accrue 1,000 hours of service within a 12-month window in order to participate in 401(k)-style plans. Starting in 2024, those who work at least
6. Tax credits for small business plans
Small-business owners face a number of obstacles to providing retirement plans, including the high cost of offering this benefit. To address this hurdle, SECURE increased the maximum tax credit for setting up a new plan
Starting in 2021, entrepreneurs also have the opportunity to provide retirement benefits through multiple employer plans (MEP) and pooled employer plans (PEP). Making use of these outside plans can mean fewer administrative challenges for a small business, but it also involves giving up some of the control an employer would typically have in a more traditional plan.
7. Less time to draw down inherited IRAs
While the law introduced a number of changes favorable to IRA owners, not everyone was better off in the wake of SECURE—among them, non spouses who received an IRA as part of an inheritance. Before, these heirs could take smaller distributions over the course of their lifetime, reducing their annual income tax burden and allowing a big chunk of the money to continue growing on a tax-deferred basis.
The act changed that,
What to expect with SECURE 2.0
In March 2022, the House approved another bill—the
If enacted, the House version of SECURE 2.0 would include:
Expansion of auto-enrollment
Access to a workplace retirement plan is one thing—getting workers to contribute is quite another.
Supporters of SECURE 2.0 hope to change that by including a rule that would automatically enroll new employees,
Church- and government-run plans, as well as new companies and small businesses with fewer than 10 employees would be excluded from this requirement.
Delayed mandatory distributions
The original act pushed the age for required minimum distributions to 72. The newer bill would gradually push back the age for RMDs even further—
Increased catch-up contributions
Current IRS rules allow workers age 50 and older to contribute an additional $6,500 per year to workplace plans compared with younger employees. SECURE 2.0
Faster eligibility for part-time workers
The 2019 act already expanded the number of part-time workers who could participate in a workplace retirement plan. Under that law, employees are eligible to participate in workplace plans if they fulfill one of two requirements: they worked 1,000 hours within a 12-month period or they worked 500 hours in three consecutive years. SECURE 2.0
Increase in the Saver's Credit
The Saver's Credit provides tax relief to low- and middle-income taxpayers who contribute to an IRA or workplace plan. The credit amount is
Navigating your retirement options
Should SECURE 2.0 become law, it will make qualified retirement plans accessible for more Americans. On the other hand, it will also add complexity to the already intricate set of rules governing these accounts. A local