All You Need to Know About the SECURE 2.0 Act By Krishna Rao
The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act is a recent legislative measure that was signed into law. This act seeks to make improvements to existing retirement savings plans by introducing new provisions to benefit workers, retirees, and businesses. The new legislation was introduced in response to the changing demographics of the workforce, where workers are living longer and seeking greater flexibility in their retirement planning.
Your financial future may be impacted by the retirement plan changes made by the SECURE 2.0 Act. Some of the main changes from the Act are as follows:
Matching for Roth accounts
The SECURE 2.0 Act’s first noteworthy element allows businesses to offer their staff the choice of receiving vested matching contributions to their Roth IRAs. This represents a substantial change from the past, when matching contributions were limited to conventional pre-tax accounts.
Roth retirement plans allow for after-tax contributions, after which earnings can increase tax-free. As a result, retirement withdrawals are tax-free, which can result in significant savings for the employee. Employees will have the opportunity to maximize their tax savings if their employers offer the option of matching contributions to Roth accounts.
It’s crucial to remember that, unlike Roth IRAs, Roth accounts must make required minimum distributions (RMDs) from an employer-sponsored plan until tax year 2024. RMDs for Roth accounts will then be equal to those for conventional pre-tax accounts. In order to clear up any misunderstandings, employers should explain this to their staff.
Overall, the option for employers to pay matching contributions to Roth accounts gives them more freedom to customize their retirement plans to suit the needs of their workforce. For both businesses and people trying to maximize their tax savings in retirement, it’s an exciting trend.
New and Improved RMDs
The SECURE 2.0 Act makes some substantial changes to required minimum distributions (RMDs). The age at which owners of retirement accounts must start taking RMDs will increase from 72 to 73 on January 1, 2023. However, you must continue taking RMDs as scheduled if your 72nd birthday is in 2022 or earlier.
Additionally, starting in 2033, this Act will raise the starting age for RMDs to 75. Retirees now have a little more time to put money down for their future and can retain more of it in their accounts for longer periods of time thanks to this adjustment.
Additionally, the current 50% penalty for failing to take an RMD will be reduced to 25% of the RMD amount not taken. More retirees should be encouraged by this decrease to adhere to RMD regulations and make sure they are annually withdrawing the proper amount from their retirement accounts.
Additionally, beginning in 2024, the new law exempts Roth accounts in employer retirement plans from the RMD requirements. For retirees who prefer to retain their money in Roth accounts to avoid taxes, this exemption gives them greater freedom.
The excess annuity payment can be allocated to the year’s RMD if an individual has in-plan annuity payments that are greater than their RMD requirement. For retirees, this provision smooths out the payment process and does away with the necessity for extra payments throughout the year.
Finally, it’s crucial to remember that retirees have a few choices when it comes to taking their first RMD. The deadline for taking it is December 31, 2024, although they have the option to postpone it until no later than April 1, 2025. Prior to making any decisions, it is always a good idea to speak with a financial advisor to determine which course of action is best for the individual’s particular financial situation.
Changes to annuities
A number of annuity-related adjustments are made under the SECURE 2.0 Act, with a special emphasis on Qualified Longevity Annuity Contracts (QLACs). Deferred income annuities, known as QLACs, can be bought with retirement assets. Retirement beneficiaries receive a lifetime income stream from a QLAC, with payments required to start at or before age 85.
The SECURE 2.0 Act makes several significant changes, one of which is an increase in the cash cap for QLAC premiums. Retirees will be able to invest up to $200,000 in QLACs starting on January 1, 2023, a significant increase from the existing cap of $145,000.
Additionally, the Act does away with a previous restriction that set the maximum premium amount at 25% of a person’s retirement account balance. Retirement savers now have greater freedom because they can put more of their retirement funds into QLACs, providing a reliable income stream for their later years.
Higher catch-up contributions
The SECURE 2.0 Act’s provision for larger catch-up contributions is one of its main advantages. Beginning January 1, 2025, people ages 60 to 63 will be able to make catch-up contributions to a workplace plan of up to $10,000 per year. This is an increase from the current catch-up payment for individuals 50 and older in 2023 of $7,500.
It’s crucial to remember that all catch-up contributions made to a Roth account at age 50 or older must be made in after-tax money if you made more than $145,000 in the previous calendar year. Individuals who earn $145,000 or less annually, inflation-adjusted, are exempt from this Roth requirement.
It’s also important to note that those 50 and older can currently contribute up to $1,000 in catch-up contributions to their IRAs. With this Act, this limit will be indexed to inflation, which means it may rise annually in accordance with increases in the cost of living as determined by the federal government.
Overall, the Act’s larger catch-up contribution limits give people the chance to boost their retirement savings and perhaps even their retirement income.
Qualified charitable distributions
Changes to qualified charitable distributions (QCDs), a fantastic method to support charities while lowering taxes, are also part of the SECURE 2.0 Act. People who are 70 1/2 years of age or older will be able to choose to use up to $50,000 as part of their QCD limit as a one-time gift to a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity starting in 2023.
It’s crucial to remember that this sum, if appropriate, counts against the annual RMD. By the end of the calendar year, gifts must be made directly from the IRA in order to be considered. Additionally, QCDs can only be given to 501(c)(3) organizations that meet the requirements, not to all charities.
The SECURE 2.0 Act is a step in the right direction toward enhancing retirement security and assisting people in better planning for their golden years. Be careful to speak with a financial counselor if you’re interested in making use of these new laws to identify the best course of action for your particular circumstance.
For younger audience
Automatic enrollment and automatic plan portability
One of the most significant changes made by the SECURE 2.0 Act is that starting in 2025, companies will be required to automatically enroll qualified employees in 401(k) and 403(b) plans with a minimum contribution rate of 3%. This is an effort to address the issue of Americans’ lack of retirement savings, especially among younger workers who are not saving enough. It is hoped that automatic enrollment in retirement plans will encourage more Americans to start saving for the future and raise the nation’s total savings rate.
The Act also permits retirement plan service providers to provide plan sponsors with automatic portability services, allowing employees’ low-balance retirement accounts to be transferred to a new plan when they move employers. For lower-balance individuals who generally cash out their retirement plans when they leave employers rather than continuing to save in another eligible retirement plan, this adjustment is especially helpful.
A significant step toward raising Americans’ total retirement savings rate is automatic enrollment and automatic plan portability. The SECURE 2.0 Act attempts to solve some of the key obstacles to retirement savings, such as procrastination and inaction, as well as give much-needed assistance to those with smaller account balances. It does this by automatically enrolling employees in retirement plans and making account transfers simple. The objective is to inspire more people to begin saving for the future and to improve the security of retirement for all Americans.
The SECURE 2.0 Act encourages plan participants to save for emergencies in addition to retirement funds. Starting in 2024, defined contribution retirement plans—like 401(k) plans—will be able to establish an emergency savings account. As a result, workers are permitted to designate a portion of their retirement payments to a special emergency fund.
The maximum yearly contribution to the emergency savings account is $2,500, whichever is less and is determined by the employer. The first four withdrawals made each year are exempt from taxes and penalties, giving plan participants the freedom to access their emergency savings as needed. For people who might not have the sufficient reserves to handle unforeseen costs, this function is extremely helpful.
Like regular retirement contributions, contributions to the emergency savings fund may also be eligible for an employer match. This gives staff members still another reason to take part in the program and accumulate emergency funds.
Participants in plans may be more inclined to save when there is an emergency fund available. This can reduce financial stress and assist people in avoiding taking on high-interest loans or using their retirement funds.
In general, the SECURE 2.0 Act’s requirement that retirement plans include an emergency savings account is a significant step toward fostering financial security for individuals and families.
Student loan debt
The SECURE 2.0 Act’s introduction of matching contributions for employee student loan payments is among its most important aspects. This indicates that starting in 2024, businesses will be permitted to contribute to their employees’ retirement accounts in an amount equal to the student loan payments made by those employees. This is fantastic news for workers who are struggling with student loan debt since it gives them an additional incentive to save money while they are repaying their loans.
The minimum 401(k) contribution requirements of the company will be met by the matching contributions for student loan payments. This implies that an employer will continue to make matching contributions to an employee’s retirement account even if they are paying off student loan debt.
This is a game-changer for those who have student loan debt, since they have long struggled to strike a balance between preparing for retirement and repaying their debt. Now, thanks to the SECURE 2.0 Act, they will be able to do both at once.
Regarding 529 Plans, the SECURE 2.0 Act also made some significant changes. For those who don’t know, a 529 plan is a tax-advantaged savings program created to aid families in setting aside money for future educational costs.
Under the new legislation, the beneficiary may now roll over funds from a 529 plan after 15 years to a Roth IRA. It’s crucial to remember that these rollovers cannot total more than the aggregate before the 5-year window closes on the payout date. In other words, if you make a $20,000 contribution over a ten-year period to a 529 plan, you can only roll over up to $20,000 into a Roth IRA after fifteen years.
It’s also crucial to remember that the rollover counts towards the annual Roth IRA contribution cap. For instance, if the annual contribution cap for that year is $6,000 and you roll $5,000 from a 529 plan into a Roth IRA, you can only make an extra $1,000 contribution to the Roth IRA for that year.
Everyone’s financial situation is unique, so it’s crucial to speak with a financial advisor or tax expert to determine how the changes brought about by Secure 2.0 may affect your particular situation. Nevertheless, for families looking to maximize their education savings while also making retirement plans, the option to roll over 529 plan assets to a Roth IRA after 15 years may offer more flexibility.
About the Author
Krishna Rao is a former financial planner who now lives in Tampa. He was employed by Wells Fargo Wealth Management prior to retiring.