SECURE Act 2.0 was signed into law at the end of 2022. Here are a few ways it could affect your retirement.
After consumers throughout America were forced to endure a harsh financial storm in 2022, the year came to a close with President Biden signing a bill intending to increase and enhance the capabilities of retirement accounts. The bill is commonly referred to as SECURE Act 2.0, and it is the follow up to the Setting Every Community Up for Retirement Enhancement Act of 2019. It is expected to assist retirees and pre-retirees even further in the pursuit of a comfortable and sustainable retirement. At Bonsai Financial, we think it’s important that we go over the biggest changes that have already taken effect as well as ones that will roll out over the course of the next decade.
- Pushed Back RMDs [1,2]
As of the beginning of 2023, the age at which retirees must begin taking required minimum distributions from their qualified retirement accounts is 73. Previously it was 72, meaning that retirees will now have an extra year to plan for the distribution of their accounts or enact a strategy to minimize taxes on tax-deferred accounts. Furthermore, the RMD age will move back to 75 in 2033; however, in all cases, if you have already begun taking RMDs, you must continue to take them.
Ed Slott, an American financial expert, a CPA and the president of Ed Slott & Co., looks to simplify dates a bit with a quick guide. He says those born in 1950 or earlier should use age 72 as their expected RMD age, while those born between 1951 and 1959 should use age 73, and those born in 1960 or later should use age 75.
- Lowered Penalties for RMD Failures 
Prior to SECURE Act 2.0, failure to take required minimum distributions 1) in the right amounts, 2) from the correct accounts 3) by the deadline of midnight, December 31st each year could cause you to incur an additional 50% penalty on the amount not withdrawn, a hefty price on what may be your most precious assets in retirement. Now, the penalty for not withdrawing the minimum amount has been reduced to just 25% with the potential to drop to 10% if corrected in a timely manner, which Ed Slott says typically means within a two-year timeframe.
- Increased Catch-Up Contributions [1,3,6]
Currently, those over the age of 50 can make catch-up contributions of $7,500—up from $6,500 in 2022—to employer-sponsored plans like 401(k)s, while catch-up contributions of $1,000 (above the total contribution limit of $6,500 for 2023) can be made to either traditional or Roth IRAs by those age 50-plus. It’s also important to know that individuals in higher income brackets may not be able to contribute to IRAs.
Beginning in 2025, those age 60 to 63 will be able to make catch-up contributions of $10,000 to employer-sponsored plans, and the limit will be indexed to inflation thereafter. Additionally, catch-up limits for individuals age 50 or older for both traditional and Roth IRAs will be indexed to inflation beginning in 2024. Ideally, this should give those nearing retirement a chance to grow their accounts as they close in on that important stage of their lives.
- Increased Options for Employer Matches 
Prior to SECURE Act 2.0, even if employers offered a Roth option for their 401(k) or similar plan, the employer match amount was required to be made on a pre-tax basis to a traditional account, meaning taxes would be owed when that portion of the money was withdrawn. The SECURE Act 2.0 allows employers to offer post-tax matches to Roth accounts, meaning employees pay taxes now but the match amounts can grow and distribute tax-free later.
Additionally, beginning in 2024, employers may match student loan payments with contributions into retirement accounts. For example, if a qualifying student makes a student loan payment of $500, that payment is able to be matched and contributed to a retirement account if it’s within the matching capabilities of the plan, allowing it to grow for the future. This allows students who may be buried deep in student debt to still achieve their employer match in a retirement account, meaning they won’t miss out on valuable contributions due to student loan obligations.
- Auto-Enrollment into Employer-Sponsored Plans 
Enrollment into new employer-sponsored plans, such as 401(k) and 403(b) plans, will be automatic beginning in 2025. Upon hiring or upon the inception of the 401(k) plan, employees will automatically be added at a rate of at least 3% but no higher than 10%. Despite automatic enrollment, employees will still have the ability to opt out of the plan.
Employers already have the right to remove former employees with low balances from their retirement plans by cutting them a check for the remaining amount if the employee has taken no action to move their money. Beginning in 2024, the definition of a low balance will be more than $1,000 but less than $7,000, and SECURE Act 2.0 portability provisions will allow employers to make a tax-free rollover distribution of a low balance account into an account in the former employee’s name at their new job without their permission.
Other SECURE 2.0 Act provisions include the establishment of the nation’s first lost-and-found database for retirement accounts which will be undertaken by the U.S. Labor Department at some point in the future.
Ideally, all of these changes could help people end up with higher savings when they retire.
- New Options for 529 Plans 
Beginning in 2024, unused funds from 529 plans, which are tax-advantaged accounts traditionally used by grandparents and parents to help a beneficiary pay for college, can now be rolled over into a Roth IRA on behalf of the plan’s beneficiary.
This could provide a small boost to an individual’s Roth IRA, but you may want to look out for a few distinct limitations to this new option. First and foremost, the 529 account must have been established and in place for at least 15 years. There is a $35,000 limit on funds able to be converted, and that is an overall total, not an annual total.
Furthermore, rollovers will be subject to the IRA contribution limit, which for 2023 is $6,500 (plus $1,000 if age 50 or older), and the beneficiary must have earned income of at least that amount in the year the rollover is completed.
There are still a lot of questions about this provision of SECURE Act 2.0 which must be clarified by lawmakers or the IRS, including the naming or changing of beneficiaries. Prior to SECURE Act 2.0, beneficiaries of 529 plans could easily be changed, and account owners could even name themselves as beneficiaries as long as funds were used for legitimate education expenses.
- Increased Flexibility in Annuities [1,5]
Annuities, which are a contract with an insurance company rather than a direct investment in the market, can offer principal protection and a rate of growth guaranteed by the issuing carrier. They have the potential to allow you to participate in stock market upside without experiencing market decline.
SECURE Act 2.0 offers a bit more flexibility in the purchase of qualified longevity annuity contracts, or QLACs, with funds held in qualified retirement accounts. Previous limits held premiums to 25% of an account’s balance and capped them at $145,000, but SECURE Act 2.0 has eliminated the 25% rule and increased the total cap to $200,000, giving retirees more options in the diversification of their portfolios.
If you have any questions about how SECURE Act 2.0 might affect your retirement, please give us a call. You can reach Bonsai Financial by calling 602-343-9309!