Partisan infighting seems to be the norm in Washington, D.C., and politicians cannot find common ground on many issues. The most impactful pieces of legislation are often passed with little or no support from the opposing party. The Affordable Care Act and the Tax Cuts and Jobs Act both passed with 100% unanimity within the dominant party at that time and without a single vote from the other party. Thankfully, retirement savings reform seems to be one issue that is increasingly bipartisan. The original SECURE Act was signed into law on December 20, 2019, by President Donald Trump after passing the House of Representatives by a vote of 297-120 and the Senate by a vote of 71-23. More recently, on March 29, 2022, the House passed the SECURE Act 2.0 by a vote of 414-5.
The SECURE Act 2.0 is not the only proposed bill in Congress right now that addresses retirement savings. The RISE (Retirement Improvement and Savings Enhancement) Act and Securing a Strong Retirement Act are making their way through the House, and the Retirement Security and Savings Act and Improving Access to Retirement Savings Act are progressing through the Senate. There is significant overlap between these bills, and it is likely they will be trimmed and combined through the committee and reconciliation process.
The proposed rules make several changes to retirement accounts, their distribution requirements, retirement account administration, and retirement savings incentives. Below are some notable changes from the pending legislation. There are three types of beneficiary:
- Non-designated Beneficiaries are nonhuman beneficiaries such as estates, trusts, and charities.
- Non-Eligible Designated Beneficiaries are most non-spouse beneficiaries.
- Traditional stretch provisions apply if non-eligible designated beneficiaries inherit the IRA after the Required Minimum Distributions (RMD) began for the original owner (if death occurred after age 72). They will still have a total of 10 years to distribute, but they will have to take the traditional stretch RMD on the Inherited IRA according to the existing Table l each year until year 10, at which time the account must be distributed in full.
- Eligible Designated Beneficiaries can continue to stretch distributions the same as before the SECURE Act 2.0. Eligible Designated Beneficiaries include:
- Surviving spouses
- Disabled dependents
- Chronically ill dependents
- Beneficiaries not more than 10 years younger than the decedent
- Minor children
- Minor children can opt out of the stretch provisions and into the 10-year rule, subject to custodian approval. They may choose to do this for a few limited reasons, such as if the minor will be applying for student aid and does not want the stretch RMDs to disqualify them.
- For disabled dependents, there is a safe harbor for those who qualify for Social Security Disability Income (SSDI). If they qualify for SSDI, then they qualify as a disabled dependent for Inherited IRA purposes.
- Regulations previously used a 10-calendar-year definition for joint life. SECURE Act 2.0 changes that to 10 literal years to the day. This will affect whether the beneficiary uses IRS Table l or Table ll (both linked above). This only applies if the death occurred after the decedent reached RMD age (72).
- When determining whether to use a 5-year or 10-year distribution limit for an Inherited IRA that is in trust because the beneficiary is a minor, you can ignore secondary beneficiaries if inheritance is conditioned on the death of the primary beneficiary. When a nonhuman such as a trust, estate, or charity is the beneficiary of an IRA, the Inherited IRA must be distributed within 5 years, while human beneficiaries have up to 10 years. Under the new rules, if the primary beneficiary is to inherit 100% of the account, and the contingent beneficiaries only receive an inheritance if the primary beneficiary dies before the IRA owner, then the contingent beneficiaries can be ignored when determining the correct distribution period for the inherited IRA. This may become applicable if the secondary beneficiary of a trust is a charity. It can be ignored if the primary beneficiary is a minor and the trust must be distributed by their 31st birthday. The 10-year rule kicks in at age 21.
- The age of majority is currently state specific. The proposed rules standardize the definition of the age of majority to age 21 for Inherited IRA purposes.
- The new regulations also apply to Roth IRAs.
- Employers will be required to offer auto enrollment in 401k plans starting at 3% and going up 1% each year until the employee is making a 10% contribution annually. Employees can opt out or choose another contribution amount.
- Small businesses with 10 or fewer employees or who are less than three years old are exempt from this requirement.
- 62 – 64-year-olds can contribute up to $10,000 to their IRA each year, up from $6,500.
- The RMD age will be increased to 73 in 2022, 74 in 2029, and 75 by 2032.
- Employers can match student loan payments into 401k. This will be helpful for young workers with significant student loan debt who cannot afford to make retirement plan contributions. For example, if an employee makes payments of $6,000 toward student loans, the employer can match that amount into their 401k. This also provides an incentive for the employee to pay their loans off faster rather than contributing to their 401k because the amount they would have contributed to their 401k will be matched by their employer anyway if their payments are directed toward their student loan.
- The RMD penalty will be decreased from 50% to 25%, and possibly 10% if corrected in a timely manner.
- New regulations will allow for employers to provide gift cards and other small financial incentives for employees who contribute to their 401ks.
- Joint filers making less than $48,000 will get a 50% Saver’s Tax Credit on contributions up to $2,000.
- Proposed changes will require the Department of Labor to create a national online lost-and-found database for retirement plans.
- New rules will annually index the $100,000 Qualified Charitable Donation cap for inflation and allow a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust.
- SIMPLE IRAs and SEP IRAs will be required to accept Roth (after-tax, tax-exempt) contributions.
- Changed rules will require that catch-up 401k contributions be subject to Roth treatment (after tax). This means you will not be eligible for a tax deduction on catch-up contributions; they must be Roth contributions.
- 401k plan participants will be allowed to opt to have employer matches receive Roth treatment. Currently, matching contributions must be pre-tax.
- Companies that offer 401k plans will need to make them available to part-time employees who work at least 500 hours per year for two consecutive years, sooner than the current requirement of three years.
- 403b participants will be able to invest in collective investment trusts (CITs) rather than only annuities or mutual funds. This will provide for lower fees by achieving economies of scale.
- New rules will add a new exception to the 10% early withdrawal penalty, on amounts up to $10,000 or half of the account value, whichever is less, for distributions before age 59.5 to people who self-certify that they have experienced domestic abuse. The income tax on these distributions can be paid over three years. Amounts recontributed to the plan within three years would not be taxable.
- Tax credits will be provided to offset 401k startup costs for employers with 100 or fewer employees (up from 50). The credit would increase from 50% to 100% on up to $1,000 per employee.
While this is U.S. legislation and primarily affects U.S. residents, Canadian residents with IRAs and other qualified U.S. retirement accounts will also benefit. Because the tax brackets in Canada are more compressed, being able to defer income tax for longer is important. Many of our clients do not need their IRA distributions for living expenses and would benefit from an additional three years of tax deferral. Additionally, being able to defer their IRA income for longer may allow some Canadians to receive their OAS benefit for three years (ages 72 – 74) when they would have been subject to the clawback under the previous RMD schedule.
Many studies and surveys have shown that there is a significant portion of the U.S. population that is not saving enough for retirement. These people will face hardship if they go into retirement unprepared. Ultimately, insufficient retirement savings amongst the population could eventually affect the national budget and almost every facet of the economy. Cardinal Point is a leading Canada-U.S. wealth management firm. We specialize in cross-border tax planning, retirement planning, and comprehensive financial planning. We are fiduciaries for our clients, and our main job is helping our clients achieve their financial goals. We support legislation making it easier and more appealing for individuals to save for retirement and achieve financial independence.