While many were still in a deep sleep from the 8 meals they ate per day over the Christmas holiday, the SECURE 2.0 Act was signed into law on December 29, 2022. My colleague, Jon Dockery, wrote about the possibility of this change in May of 2022 when he penned the blog post: “Change Ahead: What could a ‘SECURE ACT 2.0’ do for you?” At that point, it was known that Congress was working on a new bill that would build upon the SECURE Act, but the details were still in limbo. Both the SECURE and SECURE 2.0 Acts were created to increase the access to tax advantaged accounts and help prevent Americans from outliving their assets (aka. to enhance financial security).
These bills have come at a much-needed time, as the U.S. retirement system’s future has many uncertainties. Over the past few decades, employers offering savings plans have decreased and individual households have become increasingly responsible for planning and managing their own retirement accounts. Unfortunately, many households are ill-equipped to manage this aspect of their household (this is a different topic for a different conversation), and many employers don’t provide educational help along the way. Not to mention, the “safety net” of the Social Security retirement program is projected to only have sufficient funds to pay 75% of the full benefit beginning in 2035. So, to say the least, change is needed.
Although I believe the new legislation is headed (mostly) in the right direction, I still have concerns. My biggest concerns are:
- How long will these changes take to filter through the financial landscape and have a beneficial impact on individual households?
- How will future legislation lend a hand in increasing consumer financial education?
While we may be waiting awhile for the answer to the questions above, everyone has a choice to be proactive in educating themselves on the changes to our system and the option to take advantage of the opportunities that are available. Below is an overview of the changes in the SECURE 2.0 Act:
Required Minimum Distributions (RMDs)
The RMD age has increased from 70 ½ to 72, and now 73. Eventually, it’ll be 75, but not until 2033 – we’ll update you then. Here is a breakdown of when you need to begin taking your RMD:
|1950 or earlier:||No Changes|
|1951-1958:||RMDs Start @ Age 73|
|1959 or later:||RMDs Start @ Age 75 (*See Below)|
|*Those born in 1959 meet the definition of two separate starting ages. To clarify, if you turn age 73 in 2033 or later, you will take your RMD @ age 75.|
- At age 50, workers or qualified individuals can make a catch-up contribution to their retirement plan. These catch-up contributions increase from $6,500 to $7,500 in 2023.
- Beginning in 2025, retirement plan contributors who are between ages 60-63 can make catch-up contributions up to $10,000.
- IRA catch-up contributions are currently $1,000 for those over age 50. Beginning in 2024, these catch-up contributions will be subject to cost-of-living adjustments. (These have been static since 2006)
Elimination of RMDs for plan Roth Accounts
Not many employers offer Roth retirement accounts to their employees, but if they do, these employees had to take RMDs out of their plan Roth account when they reached RMD age. Going forward, employer plan Roth accounts are no longer subject to RMDs. These changes align with Roth IRAs.
529-to-Roth IRA transfers
Beginning 2024, 529 assets can be transferred into a Roth IRA for the plan beneficiary. Here are a few rules:
- Transfers can only go to the Roth IRA of the 529 plan beneficiary, not the owner.
- 529 account must have been maintained for 15+ years before transfers occur. If the beneficiary changes, it would restart the 15-year clock.
- Roth transfer is limited to the max annual contribution limit of the Roth, currently $6,500. (Lifetime transfer max of $35k)
- The prior 5-year contributions (most recent) cannot be transferred.
- This is a big help: Income limits for Roth IRAs don’t apply to the transfer.
Matching for Roth accounts
For the high-earners, employers can make matching contributions and non-elective contributions to the Roth side of the employer retirement plan. Participants will be subject to income tax on those contributions. These Roth contributions will be mandatory in the case of catch-up contributions beginning in 2024 if prior-year wages are greater than $145k.
Beginning in 2023, if you are age 70 ½ and older your QCD limit of $100,000 will be indexed for inflation. (QCDs continue to be ineligible for a donation to donor-advised funds)
Incentives to Contribute
Employers can now offer small financial incentives to boost employee workplace retirement plan participation. (Example: a low-dollar gift card)
401(k) Automatic Enrollment (This is one of my favorite additions!)
Beginning in 2025, employees who qualify for 401(k) and 403(b) plans will automatically be enrolled. It will take the employee to intentionally opt-out of participation.
Student Loan Debt
Beginning in 2024, employers will be able to make a qualified retirement plan contribution to employees who are not contributing to the plan if the employee is making qualified student loan payments. This is an added benefit to employees who have student loan debt, giving employers an option of helping their employees save for their future while the employee pays off educational loans.
Retirement Savings Lost and Found
The Department of Labor will establish an online mechanism within two years that will enable individuals to search for lost retirement accounts. I’d assume employers need to be ready to report “orphaned” retirement accounts.
Although, the above highlights from the SECURE 2.0 Act are a step in the right direction for the American retirement system, our country is a long way from “Setting Every Community Up for Retirement Enhancement.” In the meantime, both employers and employees should pay attention to new legislation that is rolled out. Taking advantage of new laws is the first step in the right direction in securing a household financially. If the above prompts any questions, please don’t hesitate to reach out to our team. We love educating our clients on ways they can become more purposeful and steward their resources for the betterment of their community.