What You Need to Know about SECURE 2.0

What You Need to Know about SECURE 2.0

January 13, 2023
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Congress recently enacted landmark retirement legislation know as SECURE 2.0 that will incentivize individuals to save for retirement, while increasing access to workplace plans. The SECURE 2.0 Act expands upon the original SECURE Act passed at the end of 2019. The primary purpose of both pieces of legislation is to encourage more businesses to offer a retirement plan to their employees and to encourage employees to save more for their own retirement.

The Act contains 92 provisions – but don’t worry, I have researched them and identified which acts you need to know about. Below is a summary of the key provisions broken down by topic and age category:

If you’re over the age of 72, SECURE 2.0 will impact you because it:

  • Eliminated RMDs for Roth 401(k) accounts: starting in 2024, required distributions will no longer need to be taken from Roth 401(k) accounts.
  • Increased Required Minimum Distribution (RMD) Age for IRAs: The SECURE Act of 2019 raised the age for RMDs from 70 ½ to 72. SECURE 2.0 further raises the RMD age from 72 to 73 starting in 2023. In 2033, the RMD age will increase again to age 75.

What does this mean?

If you are born 1951 - 1959, you start taking RMDs at age 73.

If you are born 1960 and on, you start taking RMDs at age 75.

This is when you are REQUIRED to take distributions. Depending on your cash flow needs you may start taking distributions from your IRA penalty free as early as 59 ½.

What is an RMD? Required minimum distributions are the amount that the IRS requires you to withdraw annually from your IRAs and employer-sponsored retirement plans. Since contributions to these accounts were pre-tax, you haven’t paid income tax on these dollars. RMDs are a revenue source for the government since distributions are taxed as ordinary income.

 

If you’re over the age of 50, SECURE 2.0 will impact you because it:

  • Increased Catch Up Contributions under a Retirement Plan or IRA: starting in 2025, catch up contributions for those ages 60 to 63 will be increased to the greater of $10,000 (indexed) or 150% of the regular catch up (which would be $11,250 in 2023).

This is a meaningful change for those who want to catch up for retirement by being able to contribute additional dollars at age 60, 61, 62, and 63.

  • Changed the rules for Roth Catch Up Contributions: effective 2024, all catch up contributions for those earning more than $145,000 per year (indexed) must be designated as Roth contributions.

What does this mean? In 2023, the retirement plan catch-up contribution limit for those over 50 is $7,500. This year, you can choose if you want your catch-up contribution to go towards your pre-tax 401(k) or after-tax Roth 401(k). Next year, if your income is greater than $145,000 then you don’t get to choose pre-tax or after-tax – the catch-up contribution must be designated as a Roth contribution.

 

If you have or want to set up a 529 account, SECURE 2.0 will impact you because it:

  • Changed to rules to allow 529 Plan Rollovers to Roth IRAs: starting in 2024, beneficiaries of 529 plans may roll over up to $35,000 during their lifetime to a Roth IRA. The rollovers will be subject to annual contribution limits and the 529 plan must have been open for more than 15 years.

What does this mean? Originally, 529s were set up to pay for college education expenses. The 2017 tax reform package expanded 529 plan benefits to include tax-free withdrawals for K-12 tuition. Now it offers even more flexibility by being able to rollover unused 529 proceeds to a Roth IRA.  This offers your child(ren) or grandchild(ren) a significant jump start for retirement! An amazing opportunity to build generational wealth!

I hope you found this information helpful and informative. Part of my role as your advisor is to stay up to date on new laws, determine the impact it will have on you and proactively communicate them to you so we can adjust your strategy accordingly. If you would like to discuss these changes and its impact on your specific financial situation, feel free to email me, call me or schedule a time on my calendar my clicking here. I am here to talk it through with you!