Lawmakers have proposed three retirement savings bills to expand access and simplify certain rules for retirement savers and employers, but each version would fall short of comprehensive reform. The proposals would build on the improvements made by the SECURE Act of 2019 to increase the flexibility of savings accounts and expand limits for some savers, but in some cases, the proposed changes could add more complexity to an already complex retirement saving system.
Dubbed “SECURE Act 2.0,” the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. unanimously approved the Securing a Strong Retirement Act of 2021, which contains about 45 changes to simplify and expand the use of different types of retirement accounts. Major changes include:
- expand automatic enrollment and taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credits for startup costs
- allow nonprofits to pool together to offer retirement plans to their employees
- increase the age for required minimum distributions from 72 currently to 73, 74, or 75 depending on the taxpayer’s current age and reduce the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. for failure to take required minimum distributions (RMDs)
- index Individual Retirement Account (IRA) catch-up contribution limit for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
- increase the catch-up limit for taxpayers age 62, 63, and 64, but not 65, from $6,500 to $10,000 for 401(k) plans and from $3,000 to $5,000 for SIMPLE IRAs and index the limits for inflation
- allow individuals to pay down their student loans instead of contributing to their employer’s 401(k) plan and still receive an employer match in the plan
- index the $100,000 limit on qualified charitable distributions for inflation and make other changes to related rules
- create a “lost-and-found” database for retirement plans, to help employees who lost track of their accounts with previous employers when they moved on to other jobs
- to help offset some of the cost of the plan, effective January 1, 2022, catch-up contributions to 401(a), 403(b), or government 457(b) plans would be subject to Roth treatment and employees could designate Roth contributions for employer matching contributions to certain types of plans. The Joint Committee on Taxation (JCT) estimates the two changes would raise $13.2 billion and $12.8 billion from 2021 through 2031, respectively, and combined with other changes, would lead to a positive net revenue effect of $158 million the period.
In the Senate, lawmakers have introduced a similar proposal, the Retirement Security and Savings Act of 2021, which includes more than 50 changes to retirement savings rules. It focuses on related provisions to boost existing retirement saving, help small businesses offer retirement plans, expand access to savings plans, and provide flexibility for retirees using their savings, though it is not an exact companion to the House bill. Other Senate lawmakers have introduced a narrower proposal, the Improving Access to Retirement Savings Act, that includes four changes to retirement savings account rules that overlap with the larger proposals.
Many themes in the three bills match the themes of the 2019 SECURE Act. For instance, they allow more employers to pool together to provide retirement savings plans to their employees, boost tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s to offset the cost of starting new plans, and soften rules around required minimum distributions.
Some changes intend to add flexibility or expand limits for savers but do so in overly complex ways. For example, the plans could be improved by simply lifting the age for RMDs to 75 rather than a range of 73 to 75 based on current age and making one limit for catch-up contributions rather than multiple limits that vary with age.
Lawmakers will also have to think about the timing and implications of requiring catch-up contributions to be made on a Roth basis.
Currently, savers generally get to choose whether they want a Roth or traditional account, which both apply just one layer of tax on saving. Contributing on a Roth basis means a saver does not get a tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. for their contribution and does not pay taxes when the savings and earnings are later withdrawn in retirement (sometimes called a “tax-exempt account”). That contrasts with traditional contributions, where a saver does get a tax deduction for their contribution and does pay taxes when the savings and earnings are later withdrawn in retirement (sometimes called a “tax-deferred account”).
Requiring Roth catch-up contributions means savers would not get tax deductions up front for their contributions and would not pay taxes when withdrawn at retirement. If savers do not already have a Roth account, they would presumably have to set one up to comply with the requirement, and the legislation currently proposes the requirement to take effect in less than six months on January 1, 2022.
Ideally, lawmakers would work toward a longer-term solution of more comprehensive reform, such as allowing universal savings accounts (USAs). USAs are all-purpose accounts available to anyone, with no minimum contribution requirements and no restrictions or penalties for withdrawals. Like retirement accounts, they apply the proper tax treatment to saving, as they have only one level of taxation, at the time of contribution or withdrawal.
While falling short of comprehensively reforming the complex U.S. retirement savings system, House and Senate lawmakers have proposed bipartisan bills to help simplify and expand access to retirement savings accounts to more workers. As they work to reach an agreement, they should prioritize simple changes that make it easier for Americans to save.
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