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Secure Act 2.0

Secure Act 2.0

June 26, 2023

Today I want to talk about the SECURE Act 2.0.  Not every one of these provisions affects everyone, and even if I find something beneficial that doesn’t necessarily mean it’s right for you.  There’s still a little bit to learn about how certain parts of this will roll out, but I think it’s important for folks to be aware of what we know right now.

The SECURE Act 2.0, also known as the Securing a Strong Retirement Act of 2022, was recently passed by Congress as part of the Consolidated Appropriates Act of 2023. The bill builds upon the original SECURE Act, which was signed into law in December 2019 and made significant changes to the retirement landscape. The SECURE Act 2.0 aims to further improve access to retirement accounts, by promoting participation and preserving savings.

Bullet points are facts from the law and italicized text is my thoughts & commentary.

The SECURE Act 2.0 includes many provisions, here are a few of the highlights:

Significant Changes to RMDs

  • RMD commencement age is increased to 73 starting in 2023 and 75 starting in 2033. If you are turning 72 in 2023 and have already set up a distribution plan for your RMDs, you may want to consider updating your plan. If you turned 72 in 2022 or earlier, you need to continue taking your RMDs.
    • This may help delay having to pay some taxes, but I’d strongly suggest not just kicking this can down the road and instead talking to your financial advisor and CPA about a strategy to make sure you control the amount of income taxes you pay the best that you can.
  • The penalty for failing to take your RMD will significantly decrease from 50% to 25% of the missed distribution amount. The penalty may be reduced to 10% in certain circumstances.
  • Roth accounts in employer-sponsored retirement plans will be exempt from RMDs starting in 2024.

This will be beneficial to some because previously you’d be forced to rollover a Roth 401k to a Roth IRA in order to keep the funds tax deferred.  In some cases that’s still the best thing to do, but some people may be better served keep money in a 401k if the fees are lower and the investment selection satisfied their desired asset allocation.

Expanded Roth Rules

  • Small business owners can now open and contribute to Roth SIMPLE IRAs and Roth SEP IRAs.

I’m really looking forward to this.  SIMPLE and SEP IRAs are generally significantly less expensive and time consuming to administer than a 401k.  Smaller businesses that couldn’t afford the cost of 401k administration didn’t have access the tax benefits of Roth accounts, but that is set to change.

  • Employers will now be able to match employee retirement plan contributions in their Roth accounts.

For Folks who would be best served by paying taxes now instead of deferring, this is great.  Currently, if someone is getting matched dollar for dollar the employer contributions are tax deferred.  So half of the money in their retirement plan will be taxed upon distribution.  If they don’t need that money, then RMD’s can create a bit of a tax burden for some folks.  This may help alleviate that burden for people who find this to be the best way for them to invest.

  • This bill did not include any provisions that would limit or prevent the use of “back door” Roth contributions.

Currently, there are limitations on how much money someone can earn and still invest in a Roth IRA.  However, there are no limits on how much someone can convert to a Roth IRA.  So, with careful planning, folks who want to have Roth Assets and don’t currently have any pre-tax IRA assets can contribute to a non-deductible traditional IRA and immediately convert to a Roth IRA.  This can be a great strategy, but make sure to speak to your advisor and CPA before implementing it to make sure this can work for you.

Changes to Employer-Sponsored Plans

  • In 2025, businesses adopting new 401(k) and 403(b) plans are required to automatically enroll eligible employees with a contribution rate of at least 3%.

People can opt-out, but this will likely encourage more people to get started since they won’t be required to take action in order to start saving. 

  • Plan participants may withdraw up to $2,500 in emergency savings free of taxes and the early withdrawal penalty if their defined contribution plan offers the emergency savings account.
  • Individuals impacted by federally declared disasters can take up to $22,000 penalty free and take three years to pay the income tax and repay the funds to their account.
  • Starting in 2024, participants can request their student loan payments be matched by their employer within their retirement accounts.

This is great, especially for young folks getting started.  It encourages both saving for retirement and paying down debt at the same time, making a very difficult decision less of a catch-22.  

Increased Catch-Up Contributions

  • In 2024, the IRA catch-up contribution limit will be indexed to inflation, which will give it a chance to increase every year. Today, the IRA catch-up contribution limit is $1,000.
  • In 2025, workplace plan participants age 60 to 63 can make catch-up contributions of up to $ 10,000 annually. If you earned more than $145,000 in the prior calendar year, all catch-up contributions must be made to a Roth account.

529 Plan Updates

  • 529 plan assets can be rolled over to a Roth IRA for the beneficiary. The rollover is subject to the annual Roth contribution limits and an aggregate lifetime limit of $35,000.

This is fantastic and can encourage more college savings.  Currently, if money saved for college in a 529 isn’t used for qualifying educational expense, it can potentially be taxed or penalized.  Folks who want to save for their child or someone else’s education can have a little less worry about that potential tax burden, and can help give them a head start saving for retirement. 

Overall, the SECURE Act 2.0 is a comprehensive piece of legislation that aims to improve access to retirement savings and provide additional protections for retirement savers. As always, speak to your financial advisor or tax professional to further understand how the SECURE 2.0 bill impacts you.