The “Setting Every Community Up for Retirement Enhancement Act of 2019” was signed into law in late 2019. The name of the law is so hard to remember that it is simply called the “SECURE Act.”
Now called the SECURE Act 1.0, it included provisions that, among other things, raised the age for mandatory retirement plan distributions and provided increased access to retirement accounts for Americans.
But it didn’t take long for Congress to tweak the landmark bill enacted barely three years ago and create the SECURE Act 2.0! Tucked inside the just-passed 4,155-page, $1.7 trillion spending bill (gee – is that all?) are plenty of goodies, including another overhaul of the nation’s retirement laws.
So … let’s dive into some of the biggest changes – and what they will mean to most Americans…“Imagine That™!”
1. Changing the Age of the Required Minimum Distributions
Warning: This first section may cause severe drowsiness unless you are nearing retirement or have already retired!
Three years ago, the SECURE Act 1.0 increased the age for taking the Required Minimum Distributions, or RMDs, to age 72 from age 70½. And they had a 50% tax penalty if you didn’t withdraw the minimum amount required.
Under the SECURE Act 2.0, the age required for taking your minimum distributions rises to age 73 – and in 2033, the age for RMDs will rise to age 75!
What if you turned 72 in 2022? Bottom line, you’ll remain on the prior schedule and are required to withdraw the RMD this year.
If you turn 72 in 2023, however, you may delay your RMD until 2024, when you turn 73. (Oh man … still with us?) Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1st and the second no later than December 31st.
Employees enrolled in a Roth 401(k) will no longer be required to take RMDs from their Roth 401(k). This new aspect of the law begins on January 1, 2024.
In my view, the SECURE Act 1.0 and 2.0 updates were long overdue. The new rules recognize that Americans are living and working longer … and want to accumulate as much as possible in their retirement accounts before being forced to start withdrawing funds from their retirement account(s).
2. RMD Penalty Relief
Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And the SECURE Act 2.0 goes one step further. If the missed RMD is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to only 10%.
But let’s be clear, while the penalty has been reduced, you’ll still pay a fine for missing your RMD. So … make sure that you or whoever is doing your taxes knows what you need to be reporting – and when!
3. A Shot in the Arm for Employer-Sponsored Plans
Despite the ubiquitous 401(k) plans, many Americans still do not have access to employer-sponsored retirement plans … or simply don’t participate.
Starting in 2025, companies with 11 or more employees that set up new 401(k) or 403(b) plans will be required to enroll employees automatically at a rate between 3% and 10% of their salary. The research shows that simply making it an “opt-out” requirement versus an “opt-in” requirement significantly increases employee participation.
Also, the new legislation allows for automatic portability. The thinking here is this will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out – have a nice party – and take the tax penalty for a pre-age 59 ½ distribution.
In order to encourage employees to sign up, employers may offer gift cards or small cash payments. Think of it as a signing bonus.
4. Increased Catchup Provisions (& Mandatory Roth if Wages Are Above $145,000)
For those age 50 and up, the additional amount (the catch-up allowance) you can contribute to your 401(k) increases to $7,500 from $6,500.
In 2025, the SECURE Act 2.0 increases the catch-up allowance for those between ages 60 and 63 to the greater of $10,000 or 50% more than the regular catch-up allowance, indexed to inflation.
News alert: Starting in the tax year 2024, anyone eligible for the catch-up allowance will be forced to contribute those dollars to a Roth plan. The only exception to this will be if your wages are under $145,000 and indexed for inflation.
The good news is that you get to put more money away! The potential bad news is it won’t be pre-tax if you make over $145,000.
5. Charitable Contributions
Starting in 2023, the SECURE Act 2.0 allows a one-time, $50,000 charitable distribution to fund a charitable gift annuity, charitable remainder unitrust, and/or charitable remainder annuity trust. You must be 70 ½ or older to take advantage of this provision.
The $50,000 limit counts toward the year’s Required Minimum Distribution.
There is currently a popular charitable giving strategy that allows individuals age 70 ½ or older to gift up to $100,000 per year to a qualified charity. This is known as a Qualified Charitable Distribution or QCD. The QCD likewise satisfies the Required Minimum Distribution rules and allows an individual to give directly without taking the RMD as income first. Taking the RMD as income first may trigger certain additional taxes even though there is a commensurate deduction.
The SECURE Act 2.0 indexes the annual IRA charitable distribution limit of $100,000, beginning in tax year 2023.
6. Back-Door Student Loan Relief
Starting in 2024, employers can match student loan payments made by their employees. The employer’s match must be directed into a qualified retirement account. In effect, it is an incentive for employees to save for retirement at the same time they are paying down their student loans.
7. Disaster Relief
You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account.
8. Help for Survivors of Domestic Abuse
Victims of domestic abuse may need funds (cash) for various reasons to extricate themselves from a difficult situation. The SECURE Act 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free.
9. Rollover of 529 Plans (College Savings Plans)
Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary. The 529 plan must be at least 15 years old.
In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.
Overall, I welcome these changes and applaud those staffers and our elected officials who came up with these ideas. In our upcoming book, Creating Your Ideal Retirement – Starting Today (Quarter 2 of 2023), we address the Top-10 planning mistakes that keep most Americans from being able to retire well. The provisions included above will be directly meaningful in helping overcome the “frictions” we identify in the book.
What we have provided here is a high-level overview of the SECURE Act 2.0. Keep in mind that it is not all-inclusive.
We are always here to assist you, answer your questions, and tailor any advice to your needs. Additionally, feel free to reach out to your tax advisor with any tax-related questions.
There are many issues making it difficult for Americans to build adequate savings. The just-enacted bill helps address some of the challenges many people face as they march toward retirement…“Imagine That™!”
If you want a great cure for insomnia (or just like reading government documents!) here’s the SECURE Act 2.0 summary straight from the United States Senate Committee on Finance.
Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.
R. J. Kelly, Wealth Legacy Group®, Inc. – January 2023
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