When it comes to the federal government it seems like it's all bad news all the time. The 24-hour news channels have obviously discovered it's more effective to capture our attention through outrage, so endless propaganda about in-fighting and controversial but often meaningless disagreements rules the airwaves.
Once in a while, however, Congress deserves kudos for passing laws that actually improve people’s lives, and I think just such a piece of legislation is working its way through the chambers right now. The law is called the Securing a Strong Retirement Act, but we in the financial industry are just calling it Secure Act 2.0, and some of its provisions should be able to be used to improve planning outcomes for many Americans. Let’s go over a few.
The First Secure Act, passed in 2019, raised the age retirees are required to begin taking minimum distributions (RMDs) from their tax-deferred retirement accounts from a confusing age 70 ½ to 72. This was a welcome change in my practice, as it provided another level of tax control to our clients. Provisions in the Secure Act 2.0 will raise the RMD age even further, to 73 immediately and then to 75 over a decade. The later the better, in my opinion, as RMDs can have unintended consequences with tax rates and Medicare premiums, so an additional couple years of tax deferral will be very welcome.
Another welcome RMD change in the Secure Act 2.0 proposal reduces the tax penalty associated with RMD mistakes from a very burdensome 50% (one of the highest tax penalties I know of) to 25%, which while still onerous seems much more reasonable, in my opinion, as most RMD mistakes I’ve encountered were not intentional.
One of the more interesting parts of Secure 2.0 is that the new law could require employers to automatically enroll employees into the employer’s retirement plan when the employee becomes eligible. The proposed level of contribution is currently 3% of salary, which is a good start. The law of compound returns over time tells us that the earlier someone starts saving for retirement the better, so making this process seamless and easy could be very beneficial over time.
In addition, the proposed law also enables employers to provide “perks” and incentives to get employees to save into retirement plans. This type of employee perking hasn’t been allowed under previous rules, but it makes perfect sense to me as an employer and adviser.
One of the Secure Act 2.0 provisions that will require some investigation to fully understand is the law enables employers to put matching funds into employee retirement plans when the employee is not able to afford to contribute for themselves due to student loan payments. I find the provision a bit confusing, but I love the concept as I continue to work with families who are struggling under the burden of student loan debt for far too long into their careers. I think the best way to handle student loans is to skip the deferrals and aggressively tackle these loans as early as possible, and having the ability to pay off loans and save for retirement will be a welcome possibility.
Finally, another provision of Secure 2.0 that is close to my heart as a planner, is the act creates a national database for “lost 401(k)s” where savers who switch jobs could look for information on the retirement plans they may have left behind. This is a great example of government that works; I think it will be extremely useful.
As Secure 2.0 works its way through Congress and into rule making, I’ll be sure to keep exploring the new law. There are many more provisions that are sure to offer planning opportunities. I’ll keep you posted.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
