Estimated reading time: 5 minutes
It may seem like it’s been a while since an update has come out regarding the Secure Act 2.0, but that just changed! As of last Monday, the proposed bill has passed the House of Representatives and is now at the Senate level. There are several important sections in the bill, but there are a few that stick out. Below, we have outlined seven sections we believe will affect Self-Directed IRA account holders the most and have provided a brief Secure Act 2.0 overview.
If you would like to learn more about protecting your account, access the direct link to the Secure Act bill to continue reading. Additionally, if you would like a more detailed analysis of a particular section, you can click on the hyperlinked title at the start of each individual paragraph.
Section 101: Automatic Enrollment
This section states that if you meet the vesting requirements of your 401(k) provider through your employer, then you will be forced to enroll in your company’s 401(k) plan. If you have met the vesting requirements for automatic enrollment, then a minimum of 3% of your paycheck will be contributed. Once in effect, that percentage will be increased by 1% each year, not to exceed 10% (and no more than 15% if you choose to go higher or to the max contribution).
Be aware that you will have the ability to “un-enroll” from the plan. Some believe that if you are automatically enrolled, then it could make sense to keep contributing. It’s important to note that SIMPLE IRAs are exempt from this ruling.
Section 106: RMD Age Increased
Section 106 of the Secure Act focuses on required minimum distributions (RMDs). This section increases RMDs to the age of 73 starting in the year of 2023. It is currently at 72. It goes on further to say the RMD limit will increase again in the year 2030 to the age of 74, and it will increase to the age of 75 in the year of 2033.
This is most likely spaced out to help prevent any hassle caused by the increase, as was seen a few years ago when the RMD age was increased from 70 ½ to 72. There was quite a bit of confusion around this time. Many account holders that were 71 questioned if they had to take an RMD or not. Then, when the pandemic happened, there was added confusion since many people were trying to navigate new rules all at once. By spreading out the time frame of when RMD ages will increase, there should be less confusion.
Section 108 and Section 603: Catch-Up Contribution Limits
Sections 108 and 603 of the Secure Act talk about “catch-up” contributions, a type of contribution that allows you to put an increased amount of personal money into your retirement account if you are over a certain age. We will cover each section individually.
108 says that at the age of 62 (if eligible through your employer), you can contribute an additional $10,000 each year as a catch-up contribution. You can continue this catch-up contribution between the ages of 62 and 64. At age 65, you no longer can make this catch-up contribution. It is not 100% clear why Congress chose those ages. It’s important to be aware that if this is a SIMPLE IRA, the amount is $5,000 as a catch-up contribution instead of $10,000.
Section 603 goes on to say that if you are making one of the above-mentioned catch-up contributions, it must be a “Roth Component” catch up, so the catch-up must go to the Roth portion of your 401(k). Again, this means both the employer and employee make contribution via the Roth. So you would have to have one in order to do this. Note that this portion will be retro-active as of January 1st, 2022. All other parts in this proposed bill will be active starting 2023.
Section 109: Student Loans Payments as Elective Deferrals
This section targets people with student debt. Usually, if you are paying off student loans, you cannot contribute to your 401(k). If you are paying off any type of student loan debt, your employer can contribute a matching contribution (up to whatever percentage the plan allows for) of what your payment was towards the debt. It is almost as if you contributed directly to the 401(k) itself, but this way allows you to indirectly save for retirement. So, simply put, employees repay their student loans and employers contribute to the employees’ retirement plan.
Section 601: Simple and SEP Roth Contributions
This section would allow the employee to make Roth contributions directly to a SIMPLE IRA. With SEP IRAs, only the employer makes the contribution. The Secure Act update states the employer can allow this contribution to be labeled as a Roth contribution if the employee is willing to accept the retirement contribution via Roth. With all the benefits a Roth offers, we believe most people will see this as a positive option.
Section 322: Limitations on Prohibited Transactions
As a custodian, this is the section with the biggest change and impact to retirement accounts. Section 322 says that if someone enters into a prohibited transaction, the entire IRA “may not” be ceased or distributed by the IRS. Although this part is a little vague, it’s safe to believe that only the asset and any additional profit made from that asset would be distributed based off the Prohibited Transaction. Therefore, the IRA would still be labeled as an IRA. This is very similar to how a Solo 401(k) works, where the prohibited transaction only applies to each investment.
Overall, we believe these updates could be a good thing for account holders. As the Secure Act updated bill continues to move through the different levels of government, it’s important to stay current with these updates. We will continue to monitor and post updates, but if you would like more information or would like to have a detailed conversation about the Secure Act or your SDIRA, you can schedule your free 1-on-1 consultation with an IRA Specialist.