Revisiting the Secure Act 2.0
The SECURE Act 2.0, or the Setting Every Community Up for Retirement Enhancement Act of 2021, is a bipartisan bill signed into law on December 29th, 2022. The bill aims to increase access to retirement savings plans and encourage more Americans to save for retirement. This bill includes several key changes to retirement savings plans and tax rules that could significantly impact how Americans save for their golden years. Overall, there are over 90 provisions addressed in the bill, and we will discuss a few more impactful changes within this article.
RMD Changes: Beginning January 1st, 2023, the Required Minimum Distribution (RMD) age has increased from age 72 to age 73. This change has no impact on those who have already begun taking RMDs prior to this year; you will continue to do so. By 2033, the RMD age will be pushed up to age 75. This change allows individuals more flexibility in managing their retirement savings and continuing to defer taxes on their retirement accounts.
529 to Roth IRA Rollovers: Another interesting highlight to come out of the SECURE Act 2.0 is the ability to convert unused 529 plan savings to Roth IRAs for the account beneficiaries. Beginning in 2024, if a beneficiary of a 529 plan has unused savings towards education, they may be able to roll this into a Roth IRA for their benefit. Up to $35,000 can be converted into the Roth IRA subject to the account being open for at least 15 years, and annual rollover amounts not to exceed the Roth annual contribution limits. This change gives the 529 account owner another option to consider in the event their beneficiary has yet to use the entire savings for education. Instead of cashing out the 529 plan and paying taxes and penalties, they can now fast-track their Roth IRA.
Increase in Catch-Up Contributions: Under current law, individuals over the age of 50 can make $1,000 catch-up contributions to their traditional and Roth IRAs. Beginning in 2024, the SECURE Act 2.0 would index the catch-up contributions to IRAs to inflation, providing individuals with more opportunities to save for retirement. Also, beginning in 2025, 401k participants ages 60 through 63 can contribute the greater of $10,000 or 150% of the standard catch-up amount to their defined contribution plan. The catch-up amount for people age 50 and older in 2023 is currently $7,500.
Changes to Roth Employer-Sponsored Plans: Under current law, employer matching, and nonelective contributions are made on a pre-tax basis to participants’ accounts. The Act will allow (but not require) defined contribution plans (401k plans) to provide participants with the option of receiving matching or nonelective contributions on an after-tax Roth basis. Also, before the passing of the Act, SIMPLE IRAs and SEP IRAs could only accept pre-tax funds. Now, for tax years starting in 2023, both SEP and SIMPLE IRAs can offer Roth options. Employers will need to update plan documents, so it may take time to truly be in effect.
Penalty-Free Early Withdrawals: The current tax code imposes a 10% penalty for distributions taken from a retirement account prior to reaching age 59-1/2. SECURE Act 2.0 expands the circumstances where penalty-free withdrawals could occur. Exceptions to the 10% penalty include:
• The penalty for early withdrawals is waived for those certified by a physician as having a terminal illness or condition that can reasonably result in death in 84 months or less.
• Effective Jan. 1, 2024, “hardship” withdrawals are available for individuals who have been subject to domestic abuse equal to the lesser of $10,000 or 50% of the vested balance of the retirement account. The withdrawal must occur within one year after the individual became a victim of abuse. And all or a portion must be repaid within three years.
• Effective in 2026, withdrawals of up to $2,500 per year can be made to pay premiums on certain long-term care contracts.
New Rules Around QCDs: For individuals aged 70½ and older, Qualified Charitable Distributions (QCDs) remain an excellent option to accomplish their charitable giving. SECURE Act 2.0 allows for an increase to the maximum annual limit for QCDs and provides new opportunities for their use. For 2023, the maximum QCD limit will remain at $100,000 per individual and $200,000 per married couple. Beginning in 2024, the maximum limit will be indexed annually for inflation, which means it will increase year to year.
In summary, the SECURE Act 2.0 is a bill that aims to increase access to retirement savings plans and encourage more Americans to save for retirement. The bill includes several key changes to retirement savings plans and tax rules, including changes to Required Minimum Distributions (RMDs), rollovers of 529 plans to Roth IRAs, increased catch-up contributions, changes to Roth employer plans, penalty-free withdrawals, and new rules around Qualified Charitable Distributions (QCDs). The bill could provide more flexibility and options for savers, allowing them to better plan for their retirement and manage their savings.
Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten
