SECURE 2.0: OVERVIEW AND OPPORTUNITIES

SECURE 2.0: OVERVIEW AND OPPORTUNITIES

January 19, 2023
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SECURE 2.0 was signed into law by President Biden on December 29, 2022 as part of a larger appropriations bill to fund the government. A kind of sequel to the SECURE Act passed by the Trump Administration in 2019, SECURE 2.0 makes it easier to save for retirement, easier to preserve savings in retirement, and easier for businesses to provide retirement benefits. SECURE and SECURE 2.0 were both jointly sponsored by Democrats and Republicans and had broad bipartisan support. SECURE 2.0 is a significant piece of legislation that addresses some of the challenges faced by those at different stages of saving for retirement as well as those already in retirement. 

Because of the law’s broad demographic scope, which includes provisions that specifically target young workers, it may also provide opportunities to think about intergenerational wealth planning. The law also makes a wide variety of retirement or savings vehicles easier to use or more flexible, including 401(k) and 403(b) plans, IRAs, 529 plans, and qualified longevity annuity contracts (QLACs). These changes may provide an opportunity for more effective or expanded use of tax-advantaged savings vehicles as you pursue your financial goals.


EXPLANATION

Required Minimum Distribution (RMD) Changes
The SECURE Act of 2019 raised the age for RMDs from 70½ to 72. SECURE 2.0 further raises the RMD age from 72 to 73 in 2023 and 75 in 2033.

If the account owner turned 72 in 2022 or earlier, he/she will still need to continue taking RMDs as scheduled. If the owner is turning 72 in 2023 and has already scheduled withdrawals, he/she has the option to update the retirement account withdrawal plan.

Starting in 2024, Roth accounts in employer retirement plans will be exempt from RMD requirements.

And beginning immediately, for in-plan annuity payments that exceed the participant's RMD amount, the excess annuity payment can be applied to the year's RMD.

Additionally, SECURE 2.0 reduces the penalty tax for failures by an individual to take the minimum distribution from 50% to 25%. Further, if the failure is corrected in a timely manner, the excise tax is reduced from 25% to 10%. Please consult a qualified tax advisor for more about this. These changes are effective for 2023.

529 Plans and Retirement Savings
Beginning in 2024, excess assets in a 529-qualified tuition program will be eligible for a tax-free rollover to a Roth IRA. The beneficiary of the 529 account and the Roth IRA must be the same, and the 529 account of the beneficiary must have been maintained for at least 15 years.

The rollover will be subject to the lesser of (1) the regular Roth IRA limits (without the income limits) or (2) the aggregate amount contributed to the 529 account over the previous five years (including earnings).

The rollovers are subject to a per-beneficiary lifetime limit of $35,000.


Emergency Savings Provision
SECURE 2.0 enables emergency savings accounts to be created within 401(k) plans, which will allow employees to save for emergencies and make withdrawals without penalty.

Additionally, there is a provision that will no longer subject emergency distributions from retirement plans (excluding Defined Benefit plans) or IRAs to the 10% early distribution tax. There will be a limit of one emergency distribution per year and that distribution cannot exceed the lesser of $1,000 (not indexed) or the excess of the individual’s vested benefit over $1,000 (not indexed).

Only employee contributions can be made towards the emergency savings account; however employers must match the contributed amount into the standard portion of the plan, not the emergency savings account, at the same rate they match regular contributions to the plan. This provision is effective for 2024.


Catch-up Contribution Increase
There are two significant changes to catch-up contributions included in SECURE 2.0. First, effective in 2024, all catch-up contributions for individuals earning more than $145,000 per year (indexed) must be made on a Roth, or after-tax, basis. This does not apply to SIMPLE plans.

Second, individuals between the ages of 60 and 63 will be eligible for a higher catch-up contribution limit beginning in 2025. Current law limits catch-up contributions to $7,500 (except for SIMPLE plans, which limit to $3,500). Under SECURE 2.0, effective in 2025, individuals will be able to contribute the greater of $10,000 (indexed) or 150% of the regular catch-up (which would be $11,250 in 2023). For SIMPLE plans, individuals will be able to contribute the greater of $5,000 or 150% of the regular SIMPLE catch-up (which would be $5,520 in 2023).

If you earn 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. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement and can make pre-tax catch-up contributions.

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, thus it could increase every year given federally determined cost-of-living increases.


Student Loan Debt
Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, providing an incentive for younger workers to build retirement savings while paying off student loans. Beginning in 2024, employers will be permitted to make matching contributions under a 401(k), 403(b) or SIMPLE IRA plan based on a participant’s student loan repayments. Government employers would also be permitted to make matching contributions in a section 457(b) plan or another plan with respect to such repayments. Both provisions are effective for 2024.

CONCLUSION

With over 90+ items in SECURE 2.0 that all have varying impact, timing, and eligibility, contact us today to talk through what SECURE Act 2.0 means for you.



This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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