When the original SECURE Act was enacted in 2020, it made substantial changes to the way we save and prepare for retirement. Now, just three years later, the word SECURE is back on everyone’s mind. As part of a $1.7 trillion budget bill signed into law in December 2022, the SECURE 2.0 Act is bringing even more changes to the retirement landscape, partly in response to the ripple effects of record-high inflation.
Let’s get into the legislation everyone’s talking about, including how it may impact your financial plans.
What is SECURE 2.0?
The original “setting every community up for retirement enhancement” (SECURE) Act legislation changed several key elements of financial planning, particularly for business owners and anyone approaching retirement.
Notably, it was the original SECURE Act that raised the age for required minimum distributions (RMDs) from a retirement plan from age 70 1/2 to 72. The act also loosened some of the rules around ongoing contributions to an IRA and added rules regarding how beneficiaries handle any inherited retirement accounts. (Read more about the original SECURE Act.)
This second SECURE Act takes some of these changes even further.
Adjustments to RMDs
As of January 1, 2023, you don’t need to take RMDs until you turn 73. However, this only applies to folks who weren’t already taking RMDs. So, if you turned 72 in 2022, for instance, and started taking distributions, you must continue. If you turn 72 in 2023, we can discuss your plan to see if withdrawals still make sense.
If you fail to take RMDs, the penalty is now 25% of the missed amount (it used to be 50%). If you correct the mistake “in a timely manner” the penalty may be reduced to 10%.
One upside for those who are currently in their 60s? The age is set to increase again in a decade. Starting January 1, 2033, you won’t need to start taking RMDs until you turn 75.
How Should You Approach Your Own RMDs?
As we consider this recent change, you may be wondering how to best approach your own upcoming RMDs. Should you wait to take distributions until you’re required to do so? Or does it make sense to start withdrawing earlier and spreading out your taxable income over more years in retirement?
The answer will likely depend on your unique situation and other income sources. However, the longer you wait to begin withdrawing from your retirement accounts, the more time they have to grow and compound.
When the time does come to begin withdrawing, you can work with your advisor to determine how best to handle distributions. Maybe you’d like to receive monthly or quarterly distributions, similar to a paycheck from an employer. Or, if you don’t need the money and wish to lower your taxable income, you may decide to make qualified charitable distributions (QCD) instead. RMDs can greatly impact your retirement income and tax liability, so it’s wise to start strategizing early.
Updates to 529 college savings accounts
If you were worried about saving too much for your child’s college, the latest SECURE Act may provide some relief. Going forward, the beneficiary of a 529 plan can roll up to $35,000 into a Roth IRA account. There are restrictions, naturally: The 529 must have been open for 15 years, rollovers are subject to certain balance restrictions, and standard contribution limits apply.
Does This Change How You’ll Prepare to Pay for College?
Being able to roll a portion of your child or grandchild’s 529 plan into a Roth IRA certainly offers some flexibility to your savings plan. Should a child not need the money (whether they received scholarships or took a different path altogether), this ruling gives you the opportunity to still give to your loved one in a meaningful way — by providing future, tax-free retirement income.
Keep in mind that 529 plans are important for college planning, but they don’t have to be the only avenue you pursue. Working with a financial planner, you can review your options for balancing your own savings goals with the desire to help a loved one prepare for higher education.
Employers can offer better benefits
Starting next year (2024), employers will be able to “match” employee student loan repayment. Given that as many as 70% of college graduates have student debt, this may become a go-to recruiting tool to help employers attract talent.
Speaking of employer incentives, employers will now be able to offer vested (or after-tax) employer matches to employer-sponsored Roth retirement plans.
Previously, if your employer offered a Roth 401(k), matches were done on a pre-tax basis, even though Roth contributions are made after tax.
One thing to keep in mind? The updated SECURE Act adjusts how the IRS views these employer matches. Whether an employer chooses to offer this type of match is discretionary, and even if the employer does update its offerings, it may take time for these updates to be reflected in your benefits package.
One OTHER thing to keep in mind? Unlike Roth IRAs, employer-sponsored Roth accounts like a Roth 401(k) come with required minimum distributions. That’s set to go away, but not until 2024.
The final boost to employee benefits you may see as a result of SECURE 2.0? More incentives to save for retirement. Starting in 2025, any new retirement plan sponsored by an employer must automatically enroll employees at a 3% savings rate. It also adjusts the rules on the backend (in terms of how plan administrators operate) with the aim of making it easier to transfer (rollover) your plan when you change jobs.
New incentives to save
SECURE 2.0 increases the catch-up contribution limits for folks 60 and older starting in 2025. Those limits will start at $10,000 and may increase to reflect inflation. In fact, all catch-up contributions are now subject to inflation adjustments.
For high-earners, any catch-up contributions under the new provisions will need to be made to a Roth account.
Starting in 2024, the law also creates a provision where employees may set up a Roth-style account through their employer, if their employer offers a defined-contribution retirement plan. Contributions would be limited, but withdrawals would be tax- and penalty-free if they meet certain requirements. This offering will be limited to employees earning less than a certain amount.
New incentives to give
Finally, if you’re charitably minded, SECURE 2.0 creates several tax planning opportunities. Taxpayers older than 70½ may elect to give up to $50,000 as a one-time gift to a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity. This update to the qualified charitable distribution (QCD) provision of tax law expands the type of charitable organization donors can direct money toward. Not only that, but the lifetime allotment of QCDs—$100,000—will be adjusted for inflation starting in 2024. If you make a gift from a qualified account, it may count toward your RMDs for the year if applicable.
Talk to an expert
Experts are still working out the details for how SECURE 2.0 will be implemented. Keep in mind, the legislation is nearly 20 pages long, impacts several government agencies, and is set to roll out in phases. While we want to keep you updated on changes that may impact your financial plan, this article is intended to be educational only and is not tax advice. To assess how SECURE 2.0 might affect your family, we recommend meeting with a qualified tax professional.
