With just days remaining in 2022, SECURE Act 2.0 is here. If there’s any constant in retirement planning, it’s change. As soon as you make financial plans based on current laws, they change.
It’s like deja vu all over again. The first SECURE Act became law in the final days of 2019. The Setting Every Community Up for Retirement Enhancement Act fundamentally changed the landscape of regulations governing retirement planning.
Now, just three years later, SECURE Act 2.0 is building on those changes.
This legislation will impact retirement savers and small business owners alike.
Here are some key changes to expect from The SECURE Act 2.0:
Required Minimum Distributions (RMDs)
Currently, distributions are required from retirement plans beginning in the year you turn 72. These are known as required minimum distributions or RMDs. With SECURE Act 2.0, beginning in 2023, RMD will start for those age 73.
This will provide significant tax relief for those who don’t need to take funds to supplement their income.
Additionally, RMD penalties will be less severe. Historically, penalties for failing to take RMDs were quote stiff. Failing to take the RMD by the deadline would result in a 50% penalty.
Now, that has been reduced to 25%. If the filer identifes the error in a timely manner and corrects their tax return, the penalty can be reduced to 10%.
Qualified Charitable Distributions (QCDs)
Traditional IRA distributions are considered taxable income. However, at age 70 1/2 you become eligible for a QCD. This is where you use your IRA to make charitable contributions and reduce your tax bill. The amount you withdraw via a QCD is excluded from your taxable income.
Beginning in 2023, you can distribute a one-time gift up to $50,000 to various charitable trusts. This significantly expands the type of charitable contributions you can make and provides greater opportunities to reduce taxes.
Catch Up Contributions
For those age 50 and up, retirement laws have allowed additional retirement account contributions beyond the normal IRS limits. These have been referred to as “catch up contributions.”
Secure Act 2.0 has expanded these limits and provided for enhanced tax benefits.
For individual retirement accounts like IRAs and Roth IRAs, catch up contributions will be indexed to inflation. Despite rising costs, these contributions have been stuck at $1,000 per year. This will provide for increased savings.
Catch up contributions for qualified retirement plans for 401(k) and 403(b) will see a significant increase in 2025. Currently, those age 50 or more can contribute an additional $7,500.
The new amount will increase to $10,000. Like catch up contributions for IRAs and Roth IRAs, these will be indexed for inflation.
However, one interesting change is the tax treatment for those making more than $145,000 per year. If you are in that category, your additional contribution must be made with after-tax dollars and will receive Roth tax treatment.
529 College Savings Accounts
Beginning in 2024, unused balances in a 529 plan can be rolled over to a Roth IRA. This is a significant change that will allow people to avoid costly penalties.
However, there are restrictions:
- Rollover would transfer to the beneficiary’s Roth IRA, not the parent or account owner.
- You can’t rollover contributions or the earnings from the last five years.
- Rollovers are limited to the annual contribution limit ($6,500 in 2023)
- The 529 needs to have been in existence for 15 years.
- $35,000 cap for Roth IRA rollovers
401(k) & 403(b) Plan Automatic Enrollment
Over the last several years, new retirement plan regulations were designed to encourage plan sponsors to encourage participation in defined contribution plans. The idea was that if you automatically enroll employees into the plan, they will be in a better position to save for their future.
SECURE Act 2.0 moves further in that direction by requiring businesses to begin contributing a minimum of 3% of the employee’s compensation into the plan starting in 2025.
Roth 401(k) Plans
Historically, Roth IRAs had and advantage over their relative, the Roth 401(k). With Roth IRAs, taxpayers benefited due to their exclusion from RMDs. Roth 401(k) holders, beginning in 2024, will no longer be subject to RMDs.
Another drawback to Roth 401(k) plans relates to employer contributions. Typically, all employer contributions from matching or profit sharing are pre-tax dollars. This means money pulled out in retirement from these sources will be taxed as ordinary income.
Many plan participants are surprised to find that their withdrawals from a tax-free Roth 401(k) plan will be taxable.
These new tax laws allow for tax-free employer matching contributions. However, it isn’t certain when this will happen. Unlike IRAs and Roth IRA, qualified retirement plans take more time implement changes.
Student Loan Payments
A huge impediment to saving for retirement is student loan debt. It can be hard to prioritize retirement savings when you have student loan payments. Secure 2.0 aims to address this.
Beginning in 2024, an employer sponsored plan may provide matching contributions for an employee’s student loan payment.
This will significantly reduce a common barrier to participating in qualified retirement plans like a 401(k).
What will ultimately happen with student loan forgiveness is uncertain. At the time of this writing, the issue is being heard in federal court. It will be interesting to see how these two aspects of student loan debt work out.
Secure Act 2.0 – Conclusion
SECURE Act 2.0 is a huge step forward in the government’s effort to improve retirement savings opportunities. Is it perfect? Likely not.
Some will argue these changes don’t address increasing income inequality. In fact, many believe Secure 2.0, like other legislation before, will contribute to it.
Like most legislation, attempts to correct one problem often lead to or exacerbate others.
Regardless, keeping up with the ever-changing retirement plan rules is key. You don’t need to be a lawyer or expert in workplace retirement plans. You just need to be aware and know who to reach out to for help. A CERTIFIED FINANCIAL PLANNER™ is a good place to start.
I’m reminded of an expression I’m fond of, don’t let perfect be the enemy of good. I’d much rather improve things now rather than risk improvement for no one.
I’d love to know what you think. Please leave your thoughts in the comment section. I’d love to hear from you.