SECURE Act 2.0 - What It Means For You
Here are the highlights of how these important changes can impact you.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, brought a wide range of changes to the retirement planning landscape. And nearly three years to the day after its predecessor was passed, the US House of Representatives, on December 23, 2022, passed the Consolidated Appropriations Act of 2023, an omnibus spending bill that includes the much-anticipated and long-awaited retirement bill known as SECURE Act 2.0.
Here is an short summary of the major provisions:
Required Minimum Distributions .. One of the major headline changes from the original SECURE Act of 2019 was raising the age at which you MUST begin taking required minimum distributions (RMDs) from 401(k)-type retirement plan** and Traditional IRAs from 70½ to 72. SECURE 2.0 now pushes this out further, depending on an individual’s birth date. While those born in 1950 or earlier will see no change (as they have already reached age 72), individuals born between 1951 and 1958 will now have to start RMDs at age 73, while the RMD age for those born in 1959 or later will be 75.
** 401(k)s, 401(a)s, 403(b)s, 457s, Federal Thrift Savings Plan and other pre-tax retirement accounts
The 2023 Act also reduces the 50% penalty for failing to take RMDs to 25% of the amount that should have been withdrawn. This penalty drops to 10% if it is corrected in a timely manner.
New Exceptions To The 10% Early Withdrawal Penalty .. Typically there’s a 10% penalty if you withdraw money from these pretax retirement accounts before age 59½. The new legislation increases the number of existing exceptions, including covering certain private-sector firefighters and public safety officers. It also adds new categories, allowing individuals who are terminally ill to make limited penalty-free withdrawals.
Another new exception allows anyone with a personal or family emergency to withdraw up to $1k a year penalty-free and becomes operational in 2024. A penalty exception for those affected by federally-declared disasters is retroactive to Jan. 26, 2021. There are also now exceptions for victims of domestic abuse (who could take up to $10,000 from their employer plan, no questions asked) and payment of long-term-care premiums.
Regular Workplace Retirement Plans .. You may soon notice some changes to your 401(k)-type workplace retirement plan.
The legislation allows employers to automatically enroll employees who make up to $150k for 2023, in emergency savings accounts that are linked to a 401(k) plan. Employees could save up to $2,500 and withdrawals would be tax and penalty-free.
Student loan payments are now eligible for potential employer matching within a workplace retirement account, which would allow student loan borrowers to benefit from an employer match even if they can't afford to contribute to their own retirement plan.
Beginning in 2024, ‘catch-up’ contributions for employees 50 or older in their plans will be raised by a cost of living adjustment each year from the current fixed level of $1,000 (where it has been stuck since 2015) . The same will apply to IRA catch-up contributions.
A new tax-incentivized “Starter 401(k)” plan has been created for small businesses that do not currently offer workplace retirement plans. Such plans would include default auto-enrollment and contribution limits equal to the IRA contribution limits, among other features. Employers are now also able hand out a small cash payment or gift card to encourage workers to sign up for and contribute to a 401(k)-type retirement plan.
Roth Workplace Retirement Plans .. Those with Roth features associated with their existing workplace retirement plans get two big benefits.
As things currently stand, while Roth IRAs are not subject to RMDs during the owner’s lifetime, employer plan Roth accounts, are subject to the regular RMD rules, making them subject to RMDs beginning at age 72 (although such distributions are tax-free). Effective in 2024, the SECURE Act 2.0 eliminates RMDs for Roth accounts in qualified employer plans.
Employers will also now be able to offer Roth matching contributions into an employee’s 401(k)-type account. Currently, employer match money can only into employee pre-tax accounts. Under the new rules, employees can now choose to take the Roth match, which means they are able to pay taxes up front and then later take out the contributions, and potentially the earnings, tax-free.
Additionally, the Act authorizes the creation of Roth accounts for both SEP IRAs and SIMPLE accounts for 2023 and beyond. Previously, SEP IRAs and SIMPLE accounts could only include pre-tax funds.
Notably, although individuals technically have the legal ability to create and contribute to Roth SIMPLE and SEP IRA accounts beginning January 1, 2023, it will likely take at least some time before employers, custodians, and the IRS are able to implement the procedures and policies necessary to actually effectuate such contributions. Obviously, contributions to a SEP Roth IRA or a Roth SIMPLE account will not be excluded from the taxpayer’s income.
529 > Roth IRA .. This allows for tax- and penalty-free rollovers from 529 accounts to owners or beneficiaries’ Roth IRAs under certain conditions, starting in 2024. Beneficiaries of 529 college savings accounts would be permitted to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years.
IRA Charitable Rollover .. The legislation includes a provision that lets IRA owners who are 70½ or older take a one-time withdrawal of up to $50,000 to fund a charitable gift annuity or charitable remainder trust. That’s a tax win for IRA owners because the withdrawal doesn’t count as income and it can count toward any RMD amount for the year.
Lost and found department .. People move, change jobs and sometimes lose track of their retirement savings. The new law requires the Department of Labor to create a “lost and found” database before 2025 where you could type in your name and find any retirement money you may have forgotten about.
For Anglia Advisors clients, I am happy to offer further assistance in navigating these changes.
Below is a checklist of issues to consider:
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