After months of debate, the SECURE 2.0 Act is official. Congress recently signed the $1.7 trillion spending package which contains the Setting Every Community Up for Retirement Enhancement Act, a retirement reform package that has implications for most Americans.
While the new legislation is designed to increase opportunities to save and plan for retirement, it will affect everyone’s financial situation differently. Many of the provisions took effect on January 1, 2023, although some are scheduled for future years. Here are the key changes you should know about this new law as you revisit your long-term retirement savings and investing strategies.
Major Changes to RMDs
Individuals will have an additional year to delay taking mandatory withdrawals from retirement accounts. The Required Minimum Distribution (RMD) age increases from 72 to 73 in 2023 and up to 75 by 2033. Also, the steep penalty for failing to take an RMD will decrease from 50 to 25 percent of the RMD amount not taken. If an IRA owner withdraws the RMD amount previously not taken and submits a corrected tax return, then the penalty will be reduced to 10 percent.
For in-plan annuity payments greater than the participant’s RMD amount, the excess amounts can now be applied to the following year’s RMD. Also, starting in 2024, Roth accounts in employer retirement plans will be exempt from RMD requirements.
Increased Catch-Up Contributions
Beginning on January 1, 2025, those who are ages 60 through 63 can make catch-up contributions of up to $10,000 annually to a workplace plan, and the amount will be indexed to inflation. This is an increase from the current catch-up amount of $7,500 for those aged 50 and older.
For those that earn more than $145,000 per year, catch-up contributions starting at age 50 will need to be made to a Roth account in after-tax dollars. Starting in 2024, the IRA’s current $1,000 catch-up contribution limit for those aged 50 and over will be indexed to inflation, meaning it could increase each year based on cost-of-living increases.
Qualified Charitable Distributions
The type of charities that can receive a Qualified Charitable Distribution (QCD) has expanded. As part of the QCD limit, individuals aged 70.5 and older may choose to make a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. This amount must come directly from an IRA by the end of a calendar year and, if applicable, does count toward an annual RMD.
529 Plan Changes
The main change for tax-advantaged 529 plans is that after 15 years, assets can be rolled over into a Roth IRA for the beneficiary. Although, this is subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. This change is effective as of Jan. 1, 2024.
Employer Matching in Roth Accounts
Matching offered in employer-sponsored plans has previously been on a pre-tax basis. Employers will now be able to offer employees the option of receiving vested matching contributions in Roth accounts. Also, starting in 2024, employers may match employee student loan payments in retirement account contributions. This aims to help eliminate the push-pull decisions between paying off loans and saving for retirement.
Automatic Enrollment in 401(k) and 403(b) Plans
Businesses with 401(k) and 403(b) plans are required to automatically enroll eligible employees at a contribution rate of 3 percent beginning in 2025 with auto-escalation. Additionally, retirement plan service providers can offer employees with low-balance retirement accounts the ability to transfer funds into their new plan upon job changes to help avoid typical low-balance cash-outs.
There are also possible tax credits for businesses with up to 100 employees that are based on employee matching or profit-sharing contributions. Businesses with 50 or fewer employees may be eligible for a credit equal to 100 percent of the administrative costs of establishing a workplace retirement plan. Plus, there are provisions in the new law for part-time employees to help make them eligible for a 401k plan sooner.
The SECURE Act 2.0 aims to build on initiatives that were already implemented in 2019 to help a larger range of Americans achieve retirement security. This act is comprehensive and has additional provisions, making it important to meet with your financial advisor to understand how you may be impacted when it comes to retirement planning.
To discuss how the SECURE Act. 2.0 changes may affect your current retirement strategy, schedule a call on Bayntree’s online calendar by selecting the date and time that is most convenient for you. You can also reach us by emailing firstname.lastname@example.org.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning, and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.