SECURE Act 2.0 – Does It Impact You?
by Roger A. Shake, CFP®, RLP®, CeFT®
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in December 2019 and brought a wide range of changes to the retirement planning landscape. On December 29, 2022, President Biden signed into law a $1.7 trillion spending package. The package included the much-anticipated retirement bill known as SECURE Act 2.0.
Many of the SECURE Act 2.0 provisions take effect January 1, 2023. Still, others may take years to implement. Here’s what you need to know about SECURE Act 2.0 and how it may affect your retirement plan.
· Changes to Required Minimum Distributions (RMDs)
To keep people from using retirement accounts to avoid paying taxes, the IRS requires individuals to begin taking minimum distributions from certain qualified (retirement) accounts once they reach a certain age. The SECURE Act of 2019 increased the age at which individuals must begin taking Required Minimum Distributions (RMDs) from 70½ to 72. SECURE Act 2.0 raises the RMD age to 73 beginning January 1, 2023. In 2033, the RMD age will increase to 75. Keep in mind if you turned 72 in 2022 or earlier, you’ll need to continue taking your annual RMDs. If you turn 72 in 2023 and have already scheduled your RMDs this year, you may want to consider delaying withdrawals until they become mandatory.
Previously, the IRS imposed a penalty of up to 50% for failing to satisfy your RMD before the deadline. SECURE Act 2.0 reduces the penalty to 25% of the RMD amount and 10% if an individual corrects the discrepancy in a timely manner. In addition, ROTH accounts in employer retirement plans will be exempt from RMDs beginning in 2024.
· Changes to Qualified Charitable Distributions (QCDs)
If you don’t need your RMD, the IRS allows you to donate it to charity through what’s called a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year before the Required Minimum Distribution (RMD) deadline. However, not all charities are eligible to receive QCDs. SECURE Act 2.0 expands which types of charities can take QCDs. Beginning in 2023, individuals above age 70 ½ can make a one-time gift up to $50,000 to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity as part of their QCD limit. While this appears to be a nice “upgrade option,” it rarely makes sense to contribute such a small amount to one of these advanced planning techniques.
· Increases to Catch-Up Contributions per the SECURE Act 2.0
The IRS allows those aged 50 or above to make catch-up contributions to qualified retirement plans. In 2023, individuals over the age of 50 can contribute an additional $1,000 to an Individual Retirement Account (IRA). Currently, this amount isn’t indexed to inflation. However, that will change beginning in 2024.
Meanwhile, those 50 years old and above can contribute an additional $7,500 to an employer-sponsored retirement plan in 2023. Beginning in 2025, individuals between the ages of 60 and 63 can make annual catch-up contributions up to $10,000 to a workplace plan. This amount will continue to be indexed to inflation.
It’s important to note that if your income exceeds $145,000 in the previous calendar year, you’ll need to make your catch-up contributions to a ROTH account in after-tax dollars. Those earning less than $145,000 are exempt from this requirement.
· Employer Matching for ROTH Retirement Accounts
Prior to SECURE Act 2.0, matching in employer-sponsored retirement plans was on a pre-tax basis only. According to the new law, employers will be able to offer employees the option of receiving matching contributions to their ROTH retirement accounts. Since ROTH contributions are made after taxes, earnings within the account and future withdrawals are tax-free in most cases, making this a potentially meaningful change for some retirement savers.
· Provisions for Younger Retirement Savers
The SECURE Act 2.0 also includes provisions to help younger workers save for retirement. For example:
· Automatic enrollment and automatic plan portability. Beginning in 2025, the new law requires employers offering new 401(k) and 403(b) plans to automatically enroll eligible employees at an initial contribution rate of 3%. It will also provide the option for employees with low-balance retirement accounts to automatically transfer their balance to a new plan when they change jobs.
· Emergency savings within defined contribution plans. Starting in 2024, employers can add a ROTH emergency savings account option to defined contribution retirement plans. Non-highly compensated employees can contribute up to $2,500 annually, which may be eligible for an employer match depending on the plan’s rules. In addition, their first four withdrawals per calendar year will be tax-free and penalty-free.
· Student loan debt. Beginning in 2024, employers can “match” an employee’s student loan payments by contributing an equal amount to a retirement account on their behalf.
· 529 College Saving Plans. SECURE Act 2.0 allows 529 plan assets to be rolled over to a ROTH IRA—subject to annual ROTH contribution limits and a lifetime limit of $35,000—after 15 years. The ROTH IRA must be for the 529 plan beneficiary.
There are numerous, useful changes in the SECURE Act 2.0 for retirees and those saving for retirement. At the same time, this is complex legislation and it is important to seek the advice of a Certified Financial Planner® who can help you determine the provisions that are right for you. Retirement planning is important AND it is only one component of an overall Financial Life Plan which takes into consideration your financial needs, goals, and resources. Please contact our credentialed and experienced team at Legacy Consulting Group to help you “Bring Your Wealth to Life.”
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Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed.
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