SECURE ACT 2.0

January 26, 2023


The SECURE 2.0 Act has been signed into law by President Biden. This new legislation provides a bunch of changes designed to give Americans a leg up when it comes to retirement readiness.  And, while the majority of the act benefits people who are still working, there are some tangible benefits for retirees as well.  Let’s take a look at what this new law does.

 

While SECURE 2.0 contains dozens of provisions, the highlights include increasing the age at which retirees must begin taking RMDs from IRA and 401(k) accounts, and changes to the size of catch-up contributions for older workers with workplace plans. Additional changes are meant to help younger people continue saving while paying off student debt, making it easier to move accounts from employer to employer, and allowing people to save for emergencies within retirement accounts.

 Here are some of the most important things that the bill changes:

 Big changes to Required Minimum Distributions (RMDs).

  • The age at which owners of retirement accounts must start taking RMDs will increase to 73, starting January 1, 2023.  The current age to begin taking RMDs is 72, so individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts.  Now, if you turned 72 in 2022 or earlier, you would need to continue taking RMDs as scheduled.  If you're turning 72 in 2023 and have already scheduled your withdrawal, you may want to reconsider your withdrawal plan.  And the changes don’t end here . . . this new legislation also pushes the RMD age to 75 starting in 2033!
  • Starting in 2023, the ridiculous penalty for failing to take an RMD will decrease to 25% of the RMD amount not taken from 50% currently. The penalty will further be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
  • Additionally, Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024.
  • And beginning immediately, for in-plan annuity payments that exceed the participant's RMD amount, the excess annuity payment can be applied to the following year's RMD.

Higher catch-up contributions.

  • The government wants you to sock more money away for your retirement. Whenever you and I can save more money, it puts less stress on the Social Security system.  So, starting January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan like a 401(k), and that amount will be indexed to inflation.  The catch-up amount for people age 50 and older in 2023 is currently $7,500, so this is a big deal!
  • But, when it comes to our government, rarely do they give us something without strings . . . and this is no different. Here’s how the rule works if you earned more than $145,000 in the prior calendar year:  all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars.  So, you will have to pay tax today on the catch-up contribution.  I realize that this may be shocking thinking that Uncle Sam wants to get into your wallet or pocketbook earlier, but, in our opinion, it is a small price to pay for an enhanced tax-free retirement benefit.  Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.
  • Meanwhile, IRAs currently have a $1,000 catch-up contribution limit for people age 50 and over. Starting in 2024, that limit will be indexed to inflation, meaning it should increase every year, based on federally determined cost-of-living increases, giving investors the opportunity to sock away even more retirement savings.

 Matching for Roth accounts.

  • Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts. Previously, matching in employer-sponsored plans were made on a pre-tax basis, which meant that, when the money was withdrawn during retirement, it would be completely taxable.  So, this is a significant change, because if your company offers a Roth 401(k) option and you can get matching Roth contributions from your employer, it increases the amount of money that you can grow and access completely tax-free!  And, in our opinion, tax-free, in the long run, has more appeal than tax-deferred, so, again, this is a good change!
  • Important! Unlike Roth IRAs that have no Required Minimum Distributions, RMDs have to be taken from any employer Roth retirement plan [401(k), Thrift Savings Plan, etc.] This will end starting in 2024, when the RMD mandate on employer-sponored Roth Retirement Plans goes away.

Qualified charitable distributions (QCDs).

  • Beginning in 2023, people who are age 70½ and older may elect as part of their QCD limit a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. This is an expansion of the type of charity, or charities, that can receive a QCD. This amount counts toward the annual RMD, if applicable. Note, for gifts to count, they must come directly from your IRA by the end of the calendar year.
  • Also, because these trusts can be complicated, if you have any interest in this type of strategy, let us know. We really need to help you understand all the moving parts. 

 

Automatic enrollment and automatic plan portability.

  • This is something that has been tossed around in Washington for years and is probably long overdue. This new legislation requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees beginning in 2025, starting at a contribution rate of at least 3%.  Unfortunately, we still have way too many employees not participating in a workplace retirement plan, and this will “fix” this.
  • It also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee's low balance retirement accounts to a new plan when they change jobs. The change can be especially useful for lower-balance savers who typically cash out their retirement plans when they leave jobs, rather than continue saving in another eligible retirement plan.

 Emergency savings.

  • Company sponsored retirement plans are now able to add an emergency savings account that is really a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually and the first four withdrawals in a year would be tax- and penalty-free.
  • Giving employees penalty-free access to funds prior to age 59½ while they’re still employed, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses.

 Student loan debt.

  • Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.

 529 Education Savings Plans.

  • Some parents lament about money left inside a 529 plan when the child no longer needs it. There will be taxes and penalties assessed if the money is withdrawn for a non-educational purpose.  But, now parents and grandparents have a second option.
  • After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary (child), subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit. But this allows for this money to be used by the child in their retirement, and still remains completely tax-free.

 In conclusion, while SECURE 2.0 provides increased opportunities to save for retirement, everyone's financial situation is different. As always, let us know if you’d like to learn more or to see how these changes may specifically apply to you.

 

                           Ray