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SECURE Act 2.0: Rethinking Financial Plans

From student loans to RMDs, a little something for everyone



KEY TAKEAWAYS

  • Some enhancements to retirement plans should encourage more people to save.

  • New 529 Plan rollover capabilities but will be subject to several requirements.

  • In 2023, the age for Required Minimum Distributions (RMDs) will go up.

  • Starting in 2025, those 60 years old and older will be eligible for a new catch-up contribution.

 

It's official - The SECURE Act 2.0 is law.


SECURE stands for Setting Every Community Up for Retirement Enhancement. While 1.0 only introduced about 10 provisions, each one was pretty meaningful. With about 100 provisions, 2.0 is much larger in scope but only a few of the provisions carry much weight.

While most of the changes are focused on giving retirees and retirement plans more flexibility, there are other changes meant to help younger people prepare for retirement while managing student loan debt.

Here, we are highlighting the biggest changes for people years away from retirement and then for people near or in retirement.


People years away from retirement.


1. Automatic plan enrollment and portability

Starting in 2025, new 401(k) and 403(b) plans will be required to automatically enroll eligible employees at a 3% contribution rate. Retirement plan providers will also be able to automatically transfer low balance retirement accounts to a new plan when an employee changes jobs.

Opinion: These are good rules. Forcing people to save is a good thing, and the automatic transfers can stop people from cashing out retirement plans after they leave a job.


2. Emergency savings

Starting in 2024, retirement plans can add an emergency savings account for non-highly compensated employees. It will be a Roth (after-tax) account limited to $2,500 in annual contributions with the first 4 withdrawals in a year being tax and penalty-free. Employers will also have the option of making a matching contribution.

Opinion: Good intentions, potential problems in practice. Automatically having money go towards building an emergency fund is a great thing, but I’d rather see it done as a separate direct deposit into a high-yield savings account that has no contribution limits, currently pays 3.5%, and never worry about taxes or penalties.


3. Student Loans

Starting in 2024, employers can “match” employee student loan payments with matching payments to their retirement account.

Opinion: I like it. It allows an employee to save more for retirement while they are focused on paying down their student loans.


4. Matching Roth Contributions

Historically, employers have only been able to make pre-tax match contributions to a retirement plan. Now, employers will be able to make vested Roth match contributions for tax-free growth.

Opinion: Nice to see, expect low uptake. Most employers like a vesting schedule where a portion of the dollars become the employees’ over time instead of all at once.


5. 529 Plans

529 plan assets can be rolled over to a Roth IRA subject to:

1) the 529 plan being in place at least 15 years,

2) assets going to the same beneficiary,

3) annual Roth contribution limits, and

4) aggregate lifetime limit of $35,000.

Opinion: Nice to have, but a lot of nuances. This would have been a MASSIVE rule change, but these limitations really hamper what could have been a great opportunity for savers.


People near or in retirement


1. BIG changes to RMDs

Required starting age:

  • If you turned 72 in 2022 or earlier, you need to continue taking your RMDs as scheduled.

  • Starting in 2023, the required starting age will rise to 73. If you turned or will be turning 72 in 2023, you do not have to take an RMD distribution.

  • Starting in 2033, the required starting age will rise again to age 75.

Starting in 2023, penalties for failing to take an RMD will decrease to 25% from 50% currently. If the account owner later satisfied the RMD and submits a corrected tax return in time, the penalty will be reduced to 10%.

Starting in 2024, Roth balances in employer retirement plans will not be subject to RMD requirements.

Opinion: This is the heart of 2.0. These are meaningful, positive changes.


2. Special catch-up contribution

Starting in 2025, certain individuals ages 60 through 63 years old can make catch-up contributions up to $10,000, indexed for inflation. This would be in lieu of the current catch-up contribution of $7,500.

With a wrinkle: If you earned more than $145,000 in the prior calendar year, then all catch-up contributions at age 50 or older must be Roth (after-tax) contributions. If you earned $145,000 or less, you are exempt from that requirement.


Opinion: Being able to save more is great, but the age range seems very random and I don't see a need for the income nuance.


3. Qualified charitable distributions (QCD)

Starting in 2023, the IRS is expanding the types of charities that can receive a QCD to include charitable remainder unitrusts (CRUTs), charitable remainder annuity trusts (CRATs), or a charitable gift annuity. This expanded list of charities is limited to a one-time gift of up to $50,000, and you must be at least 70 ½.


Opinion: Noteworthy but only relevant to a very small percentage of people.


Conclusion


While SECURE 2.0 provides increased opportunities to save for retirement, everyone's financial situation is different. We will be sure to account for these changes and evolve your financial plans as needed so that you continue to make the most of all opportunities.

Frank Iozzo, CPWA®

President, Private Wealth Advisor

 

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