With tens of thousands of pages of legislation coming from Washington each year, it can be difficult to track what laws have a direct impact on you as an individual. Luckily, we’re here to give you the main points of an act passed at the end of 2022! We are pleased to inform you of the recent passage of SECURE Act 2.0, a comprehensive retirement savings package that has been approved by Congress and signed into law by President Biden. Congress and the President enacting this law was a huge bipartisan triumph. Regardless of your political leanings, most people agree that improving retirement legislation is in the country’s best interest. This new law will have a major impact on your retirement planning, and we want to make sure you are aware of the key provisions.
Required Minimum Distributions (RMDs)
Perhaps most notable of the provisions, the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account has been increased from 72 to 73, effective for anyone who turns 72 on or after January 1, 2023. This age will further increase to 75 in 2033, and penalties for missing or underestimating RMDs will be reduced, with the penalty now being 25% of the shortfall (or 10% if corrected within two years). Before, the penalty was a whopping 50%! Moreover, Roth 401(k) accounts will be exempt from RMDs starting in 2024. Those extra couple of years can equate to significant earnings that you would otherwise be required to distribute.
We would also like to highlight the increase in retirement plan catch-up contributions. The IRA catch-up contribution limit of $1,000 will be indexed to inflation starting in 2024. Similarly, starting in 2025, individuals between the age of 60 and 63 will be able to contribute an additional 50% of the regular catch-up contribution limit, providing a significant boost to their retirement savings. If these provisions were in place for 2023, an individual between 60 and 63 would be able to make a catch-up contribution to their IRA in the amount of $11,250. Combined with the current $22,500 base limit, that would theoretically bring the total contribution limit to $33,750. That’s big! This provision will allow individuals of that age to put much more of their dollars away for retirement.
Qualified Charitable Deductions (QCDs)
The SECURE Act 2.0 includes several changes to the Qualified Charitable Distribution (QCD) rules. The first of these changes now allow individuals over 70 ½ to make a one-time election of up to $50,000 to fund a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity. This $50,000 is included in the yearly maximum limit of $100,000. The second change is that beginning in 2024, the overall QCD limit of $100,000 will be indexed to inflation, allowing for further flexibility in charitable giving.
The legislation also creates a "Starter 401(k)" plan to make it easier for small companies to launch a plan and expands tax incentives for companies that start a plan. In 2025, employees at companies launching a new retirement plan will be automatically enrolled in the plan and their contribution amount will be automatically increased annually, unless they opt out. Additionally, long-term part-time workers will be eligible for their company’s retirement plan as long as they have 500 hours of service and 2 consecutive years at the company under their belt. Previously, they were required to have 3 years of service. On the topic of employee-sponsored plans, are you having a hard time tracking down one of your plans from a previous employer that you left sitting around? Now, a national database has been created as a “lost and found” to help individuals find their benefits. It may be a good idea to find those accounts and roll them over to a trusted fiduciary!
The SECURE Act 2.0 simultaneously encourages Americans to pursue higher education, providing benefits for students. Beginning in 2024, employers can match student loan payments with a contribution to their retirement plan. The purpose of this provision is to help those burdened with student loan debt who can’t afford to contribute to their retirement plan. There’s also been a change to the structure of 529 plans. If a 529 account has existed for at least 15 years, individuals can roll up to $35,000 from a 529 to a Roth IRA that is in the name of the beneficiary. We’d like to note that while the rollover is tax-free and not subject to income limits, you may only roll the IRA contribution limit to the Roth IRA each year (2023’s limit is $6,500). While 529 plans have always been versatile regarding the beneficiary, now the account’s funds can be applied to a different savings account. Congress hopes this will deter those not making sufficient contributions to a 529 because they are wary of the illiquidity.
This Act also includes many provisions allowing for greater flexibility of otherwise “illiquid” savings plans. The current tax code provides for a 10% penalty on distributions from a retirement account prior to reaching age 59.5. These changes were prompted by policymakers analyzing data that showed an increased number of Americans forced to take the penalty as they needed emergency funds in recent years. Some of these provisions are as follows:
-Employers now can create “rainy-day funds” in their employee’s retirement plans. Doing so allows individuals to withdraw up to $1,000 from their plan penalty-free
-Domestic abuse victims can withdraw up to $10,000 penalty-free from their retirement plans
-Individuals affected by federally declared disasters can withdraw up to $22,000 penalty-free from their employee-sponsored plan or IRA
In conclusion, the passage of the SECURE Act 2.0 marks a major milestone for retirement savings and will have a significant impact on your retirement planning. We strongly encourage you to familiarize yourself with these provisions and consider how they may affect your personal financial goals. This law of course has different implications for those of varying ages. If you have any questions or would like to discuss your retirement plan in more detail, come in for a meeting and we’ll tell you what provisions of this Act apply to you!