As you are probably aware of, Congress passed the new SECURE Act 2.0 building on the original SECURE Act, which was passed three years prior, almost to the day, on December 19h, 2019. The following summary is based on the things we think apply to our firm, advisors and most importantly our clients. Naturally, there is so much more in the Law, and we could not cover everything here, but we would love the opportunity to discuss the pieces not mentioned that may be affecting your specific situation. Use this link to schedule a call. But in the meantime, here is our take...
As with Secure Act 1.0, this bill offers several adjustments to our current laws surrounding saving and preparing for retirement. The SECURE Act 2.0 is poised to: adjust the age caps on traditional IRAs and increase access to tax-advantaged retirement savings accounts. Below we’re outlining the most prominent changes of this new act and how they may affect your retirement.
#1: RMDs Pushed Back to Age 73! and 74! and 75!
Like SECURE Act 1.0, SECURE Act 2.0 had a massive headline pushing back the RMD age to 73. You might be saying “it’s one year, what’s the big deal?” but this will affect every single person with a pre-tax retirement account living past age 72. This is GREAT news if you do not want to take your RMD and would rather receive (hopefully) another year of tax-deferred compounding growth. If you were only planning on taking an RMD because you were forced to, you will now be able to delay them one more year. So, who does it actually affect? Anyone who turns 72 between 2023 and 2027.
Starting in 2028, the RMD age will be 74! So, if you turn 73 on or after 1/1/2028 – 12/31/2029, you will not have to take a single RMD until you reach age 74. Starting in 2030, RMDs will kick in for anyone turning age 75!
This will not apply to individuals turning 72 prior to 2023.
This allows your retirement accounts to mature for an additional year and a half. Depending on how much you have accumulated in your account(s) thus far, these additional 1 – 3 years could have a significant impact on your retirement savings.
#2: Catch-Up Contributions
Prior to the SECURE Act 2.0, just about every retirement account had a catch-up contribution for individuals (over the age of 50), that was indexed for inflation, allowing those contributions to adequately reflect current times. All accounts EXCEPT IRA’s. To increase the catch-up contribution limit for IRA’s, congress would have to do it by legislation – which has only happened once, in 2006. The new rule will allow this increase in catch-up contribution limits to happen every year - automatically.
Additionally, Section 109 of the SECURE Act 2.0 allows for further catch-up contributions for those individuals participating in an employer-sponsored plan (i.e.: 401(k), 403(b)..) who are aged 60, 61, 62, and 63. Starting in 2025, if you are older than 59 and younger than 64, you will be able to contribute the higher amount of $10,000 or 150% of the regular catch-up contribution (currently $7,500). Based on how the law is written, you will already be able to contribute more than $10,000 to your plan if you are between those ages (example: $7,500 x 150% = $11,250).
Starting in 2024, high-wage earners will be required to make all catch-up contributions to a ROTH account.
This new catch-up contribution for those aged 60-63 does not appear to be available to those aged 64 or older.
#3: Small-Business Retirement Plans:
Like the catch-up contributions mentioned above, SIMPLE Plan participants who are age 60, 61, 62, or 63 will have their plan catch-up contribution limit increased to the greater of $5,000 or 150% of the regular SIMPLE catch-up contribution amount starting in 2025 – again, this will be indexed for inflation.
In another provision, Section 601 of SECURE Act 2.0 would create SEP and SIMPLE Roth accounts, which were not available before. You will also be able to designate employer-matching contributions to the Roth side. It is our belief that these contributions would work the same as Roth 401k contributions, but we must wait and see exactly how it plays out.
*One thing to note: Although the rules say you can start SIMPLE and SEP ROTH Accounts as of January 1st, 2023, it is most likely not feasible as custodians and plan administrators must put together policies and procedures to make sure this happens properly. Even though this may sound simple, these contributions are only allowed once the “election” is made to do so, and the IRS has to formally approve what constitutes “election.”
If a Roth election is made and amounts are deposited into a SIMPLE Roth IRA or SEP Roth IRA, the amounts contributed will be included in the taxpayer’s income – for SIMPLE IRA’s it will most likely be akin to the current ROTH 401(k). For a SEP ROTH it will most likely be added to the employee’s W-2.
#4: Required Minimum Distribution (RMD) Penalties
Historically, the penalty for missing an RMD has been one of the most punitive in the entire tax code – 50%! That means, if you were supposed to take an RMD of $20,000 and accidentally forgot – the IRS would issue a penalty of $10,000 while also requiring you to withdraw the RMD as well.
Starting in 2023, SECURE Act 2.0 reduces that penalty to 25% - still not great but much better than 50%. However, if you realize the mistake and fix it within the “Correction Window,” the penalty will be reduced to 10%.
The law states that the “Correction Window” most likely starts on January 1st of the year following the year you missed the RMD and ends on the earliest of the following:
- When the notice of deficiency is mailed to you
- When the penalty is assessed
- The last day of the second tax year AFTER the penalty is imposed.
#5: 529 to ROTH IRA Transfers Allowed
Many people have been talking about this provision in SECURE Act 2.0 and rightfully so because it’s exciting. Starting in 2024, assets held in a 529 college savings plan can be moved directly to a ROTH IRA. This will add more utility to 529 plans and allow for better planning but there are some specific conditions that need to be met.
- The ROTH IRA must be in the name of the 529 Beneficiary.
- The 529 plan account must have been maintained for 15 years or more.
- Contributions to 529 within the past 5 years cannot be moved.
- The annual limit to amount moved from 529 – to – ROTH is tied to ROTH IRA contribution limits. As always, we must account for any “traditional IRA” contributions in this calculation as well.
- The maximum lifetime amount allowed to be moved is $35,000.
While there are additional changes being proposed in this new act, above are a few of the most impactful ways in which Congress’s SECURE Act 2.0 could be making a difference in how you save for retirement.
If you would like to discuss your current situation schedule a free 20-minute call with the link below.
|About the Author |
James M. Comblo, CFF
is the President & CEO of FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients live the life they want, not the life they are forced to. To learn more about him click here.