As of December 29th, 2022, the SECURE 2.0 Act was signed and put into lawful effect by President Biden. The revised bill includes a host of provisions that influence Americans at every income level.
To help you understand these important changes, we’ve created a guide to help simplify the bill’s complexities. We’ll discuss the key changes the bill introduces while providing tips on how to make the most of the changes to help you best position yourself for retirement success.
RMDs Are Changing Again
Perhaps the most significant change in SECURE 2.0 is the update to required minimum distributions. Under the original SECURE Act, the RMD age was increased from 70½ to 72 for taxpayers who have a traditional IRA or other qualified retirement accounts. With the new legislation, however, the RMD age has been increased to 73 for those born between 1951 and 1959. The RMD age will increase again in 2033 to age 75 for those born in 1960 or later. This can provide some much-needed tax relief for retirees who don’t necessarily need to withdraw funds at that age to pay for retirement expenses. It also allows those accounts to stay invested for longer, which can provide a boost to overall retirement savings.
Another notable change to the RMD rules includes a decrease to the steep 50% penalty for missed or late distributions. Starting in 2023, the penalty will drop to 25% of the missed RMD. Additionally, IRA owners will have the ability to reduce this penalty further (to 10%) if they take the RMD and file an amended tax return in a timely fashion.
SECURE 2.0 also changes the rules around RMDs for Roth contributions in employer-sponsored retirement accounts. Starting in 2024, Roth accounts will no longer be subject to the RMD requirement. The act also expands Roth eligibility to SIMPLE and SEP IRAs starting in 2023.
Increased Catch-Up Contributions
The SECURE 2.0 Act provides greater opportunities for retirement savings by increasing catch-up contributions. The most important changes include:
- IRA Catch-Up Contributions Indexed to Inflation: While the base contribution limit to IRAs ($6,500 in 2023) is indexed annually based on inflation, the catch-up amount ($1,000 in 2023) has traditionally been fixed. Starting in 2025, IRA catch-up contributions will be linked to inflation, allowing the contribution limit to increase as the cost-of-living increases.
- “Special” Catch-Up Contributions for Employees Age 60 to 63: The SECURE 2.0 Act increases catch-up contributions for employees aged 60 to 63 starting in 2025. As of age 50, retirement plan participants are able to make catch-up contributions up to $7,500 for 2023. The new law increases this amount to $10,000 (indexed to inflation) once you reach age 60.
- Roth Catch-Up Contributions Required for Those With Wages Above $145,000: Starting in 2024, employees with wages above $145,000 will be required to make any catch-up contributions to a Roth account, effectively eliminating the current-year deductibility of those contributions.
- Increased Catch-Up Contributions for SIMPLE Plans: In 2024, the catch-up contribution limit for SIMPLE plans (IRA and 401(k)) will increase by 10%. In 2025, the catch-up contributions will be increased to $5,000 (indexed to inflation) for employees aged 60 to 63.
529 Rollovers
Many Americans save for college education through 529 accounts, which allow up to $17,000 in gift-tax-free contributions per year, or $85,000 if the lump-sum election is selected. Contributions grow tax-free as long as they are used for eligible education expenses. If they are used for an unqualified expense, the earnings are taxable and the distribution is subject to a 10% penalty.
This is where rollovers come in. The new SECURE 2.0 provisions allow unused 529 funds to be rolled over into a Roth IRA starting in 2024. There are some strict limitations to this new rule, including:
- There is a lifetime rollover cap of $35,000.
- Rollovers are still subject to the annual Roth contribution limit ($6,500 in 2023), so it may take multiple years to completely roll over the funds.
- The rollover must be made to the 529 beneficiary’s Roth account (typically the student), not the 529 account holder’s Roth (typically the parent).
- The 529 must have been open for at least 15 years.
- Contributions and earnings made in the last 5 years cannot be rolled over.
Other Important Retirement Savings Provisions
The SECURE 2.0 is a wide-ranging law that covers many additional aspects of retirement readiness and overall financial health to help taxpayers better prepare for the future.
As part of this goal, the act expands and creates new opportunities for retirement savings. For instance, employers will now be able to offer employees the choice to receive matching contributions on a Roth or pre-tax basis. Previously matching contributions were always considered pre-tax. If Roth contributions are selected, they will be considered fully vested upon contribution. Though this might take some time for employers and payroll companies to implement, this option will allow employees to choose whether their matching contributions are taxed up front (Roth) or in retirement (traditional).
Employers will also be required to automatically enroll eligible employees in workplace retirement plans at a minimum 3% contribution rate starting in 2025. Retirement accounts will also be automatically portable, meaning account balances will immediately transfer to your new employer’s retirement account if you leave your current job.
Additionally, defined contribution plans will start offering emergency savings Roth accounts for non-highly compensated employees starting in 2024. Contributions are limited to $2,500 per year, but the first four withdrawals per year would not be subject to taxes or penalties.
Also in 2024, employers will be able to match an employee’s student loan payments by contributing a matching amount to their retirement account. This provision provides an extra incentive for student loan borrowers to make payments on their loans, while also helping them save for retirement.
Need Help Understanding SECURE 2.0?
Of course, there’s more to the SECURE 2.0 Act beyond this article, and we want you to know that if you or anyone one you know has additional questions, we are here to help. We recognize that it can be difficult to understand how the changes may apply to your personal situation, and we understand that navigating the complexities of the new rules can be overwhelming.
Our team at 1on1 Financial is dedicated to guiding you on the path to a successful retirement. We strive to offer personalized advice tailored to your goals while providing the information you need to make the most of the new savings provisions. To get started, call us at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call with one of our qualified advisors. We look forward to hearing from you!
About 1on1 Financial
1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.