Under the Tree?

Greg Spears

A VANGUARD FINANCIAL planner once told me his clients’ biggest problem was that they didn’t want to withdraw money from their accounts during retirement. They lived beneath their means because they just couldn’t overcome their desire to continue seeing their assets grow.

If this describes you, too, you might be pleased to learn that required minimum distributions (RMDs) would be delayed a year or more if legislation, which currently sits before Congress, can slip through the crowded legislative calendar and pass before year-end.

Informally known as SECURE 2.0, the legislation is a grabbag of upgrades to the current retirement savings system. It would do everything from delaying RMDs until age 73—and 75 for some—to bumping the maximum 401(k) catch-up contribution to $10,000 a year from the current $6,500 limit.

All this sounds appealing, but there’s a catch. First, the House and Senate need to reconcile the differences between their two versions of the bill. Then the final version needs to hitch a ride across the finish line before the 117th Congress adjourns forever on Jan. 3, 2023.

The retirement bill isn’t controversial, but neither is it vital. That’s why its authors are looking around for a Christmas tree. That’s the nickname for a must-pass bill that emerges at the end of a legislative session. Lawmakers hang various other bills on it, like ornaments from a tree, in hopes the whole package will pass during the holidays in one great big Hallelujah Chorus.

Oddsmakers give the SECURE 2.0 bill a better-than-even chance of becoming law. If they’re wrong, the next Congress would have to start all over again—and without many of the current bill’s champions, who are retiring at the end of this legislative session.

If the bill is signed into law, however, here are some gifts you or your working-age children might discover under the tree this Christmas. Keep in mind that some details will likely change during final negotiations.

Delayed RMDs. Currently, RMDs begin at age 72. Under the House-passed version, people who turn 72 after 2022 could delay their first required minimum distribution until age 73. But it keeps going. Those who won’t turn 73 until after 2029 could delay a year longer, until age 74. And if you were turning 74 in 2032 or later, you could delay your first RMD until age 75.

Lower penalties. If someone did miss an RMD, the tax penalty would fall from 50% of the amount that was supposed to be withdrawn to 25%, or 10% if the person acted promptly to undo their mistake.

Bigger catch-ups. Workers aged 62, 63 and 64 could make $10,000 annual catch-up contributions to 401(k) and 403(b) plans starting in 2024. In a big change, plan catch-ups would have to be made with Roth after-tax dollars only, even for those aged 50 to 62. These after-tax contributions would help offset some of the cost of the new law to the U.S. Treasury.

IRA catch-ups grow. The $1,000 annual IRA catch-up limit hasn’t been increased since 2015. For the first time, it would be indexed for inflation so it could grow over time. IRA catch-ups could be made with either tax-deferred or after-tax Roth dollars.

Automatic enrollment. A 401(k) or 403(b) plan would be required to automatically enroll new workers into the plan. Many big employers do this already, but the House bill aims to make it standard practice for all employers except guppies—companies with 10 or fewer employees or which are less than three years old.

Roth 401(k) reprieve. You would no longer have to take RMDs from Roth money within your 401(k) or similar retirement plan. Today, people must roll their Roth 401(k) and 403(b) dollars into a Roth IRA to avoid having to take these withdrawals.

Roth and college matches. Plans could match employees’ 401(k) contributions with Roth dollars if both the employer and the employee choose to do so. In an unexpected plot twist, employers could treat employees’ student loan repayments as if they were 401(k) contributions, and then make matching contributions to their retirement plans on that basis.

Emergency savings. The bill would allow employees to save up to $2,500 in an emergency savings plan through automatic payroll deduction of after-tax money. Withdrawals would not be taxed or subject to the 10% early withdrawal penalty.

Believe it or not, there are dozens more fine-print provisions like this between the House and Senate versions of the bill. When it comes to the employer-based retirement system, Congress clearly feels that it can never make things too complicated.

Should the legislation pass, plan administrators, HR professionals and financial planners will all be working overtime to explain the nuances of the law to the people who could benefit. Meanwhile, half of the working population without access to a 401(k) will miss the memo, and likely continue to save too little for retirement.

I have no doubt, however, that astute investors will seize these opportunities as they arrive. I’m looking at you, HumbleDollar readers.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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