The SECURE 2.0 Act is a comprehensive bill that was signed into law on December 29, 2022, intending to strengthen the retirement savings system. It includes over 90 provisions with varying effective dates, some of which take effect immediately and others that are deferred for several years. These changes are sure to profoundly affect your retirement strategy, so it is vital to get a clear understanding of the revisions and make an appointment with your wealth manager and tax professional to go over your financial plan.
Higher Required Minimum Distribution Age
One of the most notable changes includes an increase in the required minimum distribution (RMD) age to 73 in 2023 and 75 in 2033. Your RMD is the minimum amount you must pull from your retirement account each year. Failing to do so can lead to a hefty penalty, but more on that later.
Holding off on pulling from your tax-deferred retirement accounts, such as an IRA, allows your fund to grow for a more extended period. This could be particularly useful if your investment accounts go through a tumultuous period in your late 60s or early 70s, which could lead to a portfolio-destroying negative sequence of returns.
Your RMD is calculated based on your life expectancy. The less time you have left, the more you must take out. If you start taking RMDs at age 75, it could be large enough to bump you up a tax bracket, thus possibly nullifying any gains you made by delaying. But beware, though – delaying taking your RMD will mean that it will only be more prominent once you start pulling from your account.
Decreased RMD Penalties
Failing to take your RMD on time or of the proper amount leads to stiff fines. Prior to Secure 2.0, the penalty was 50% of any required undistributed portion. For example, if your RMD is $1,000 a month and you didn’t take it, you would have owed the government $500. Fortunately, after December 29th, the fine is now ‘only’ 25% – still hefty, but nonetheless, better. Also, it is possible to fix the error within two calendar years and lessen the damage to only 10%. Every percent counts!
As of 2024, expanded extenuating circumstances will allow for penalty-free early withdrawals as well as to aid people going through financial hardship. These circumstances include domestic abuse, natural disasters, and terminal illness, though they each have their own nuances. If you believe you qualify for a penalty-free withdrawal, we recommend contacting your financial advisor first.
Your Employer and Roth 401(K)
Currently, RMD rules apply to Roth 401(K)s, but only for a short time! Beginning in 2024, you will be able to let your money grow tax-free beyond the age of 73, just as you can with a traditional Roth IRA. Also, already in effect are employer Roth matches! This is big news for Roth, so be sure to talk with a financial advisor to see if Roth matching makes sense for your personal situation.
Roth Comes to SEP and Simple Plans
Before the coming of Secure 2.0, all SEP and Simple contributions had to be made on a pre-tax basis. But as of 2023, employees can create a SEP or Simple Roth account and make post-tax contributions, though it may take a while for IRA custodians and employers to implement the new processes.
Inflation-Adjusted Catch-Up Contributions
The SECURE 2.0 Act gives IRAs a boost with catch-up contributions. Beginning in 2024, the base catch-up amount of $1,000 will be adjusted annually for inflation, following the same process as the base amount. However, it’s important to note that if the inflation-adjusted amount is not a multiple of $100, it will be rounded down to the nearest multiple of $100. This means the $1,000 amount may not increase immediately.
It also introduces a new contribution limit for employees between 60 and 63, beginning in 2025. This “special” catch-up contribution for 401(k) plans and other employer-sponsored retirement plans is the greater of either $10,000 or 150% of the standard catch-up contribution for 2024. Starting in 2026, the $10,000 limit will be adjusted annually for inflation.
529 Plan Rollovers
Coming into effect in 2024, any leftover funds in a 529 plan can be rolled over into a Roth IRA bearing the same name as the 529 beneficiary, with some conditions:
- A maximum of $35,000 can be rolled over
- Annual Roth IRA contribution limits apply
- The 529 account must have been opened at least 15 years years ago
- Funds must have been put into the 529 account at least five years ago.
These are some pretty strict restrictions, but if you feel you qualify, it is worth looking into conducting a rollover and letting those funds grow tax-free.
Expanded Qualified Charitable Distributions (QCDs)
A Qualified Charitable Distribution (QCD) is a charitable gift from an individual retirement account (IRA) to a qualified charity. It allows the account holder to make a direct transfer of funds from the IRA to the charity and deduct it from their tax burden while simultaneously potentially satisfying a required minimum distribution. Since its inception, QCDs have been capped at $100,000 a year, but from 2024 onward, that amount will be adjusted for inflation.
Also, beginning in 2023, a one-time $50,000 QCD can go into a split-interest charitable trust. A split-interest charitable trust is a type of trust that splits its interest between charitable purposes and individual interests. It combines the features of a charitable trust with those of a personal trust, providing both tax benefits and financial support to the beneficiaries.
Also, beginning in 2023, a one-time $50,000 QCD can go into a split-interest charitable trust. A split-interest charitable trust is a type of trust that splits its interest between charitable purposes and individual interests. It combines the features of a charitable trust with those of a personal trust, providing both tax benefits and financial support to the beneficiaries.
In Conclusion
There is no doubt that Secure 2.0 will change your retirement planning. These numerous changes are complicated and comprehensive, so get ahead of the game by seeking out professional assistance.
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