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How the Change in Retirement Laws Will Affect You

How the Change in Retirement Laws Will Affect You

January 19, 2023
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The Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act, was signed into law in late 2019.

Now called SECURE Act 1.0, it included provisions that raised the required age for mandatory distributions from retirement accounts and increased access to retirement accounts.

But it didn’t take long for Congress to enhance the landmark bill that was enacted barely three years ago. On December 29th, 2022, SECURE Act 2.0 was signed into law.

Tucked inside a just-passed 4,155-page, $1.7 trillion spending bill are plenty of goodies, including another overhaul of the nation’s retirement laws.

9 key takeaways on SECURE Act 2.0

  1. Changing the age of the required minimum distributions. Three years ago, SECURE Act 1.0 increased the age for taking the required minimum distribution, or RMD, to 72 years from 70½. If you turn 72 this year, the age required for taking your RMD rises to 73 with SECURE Act 2.0.
    • If you turned 72 in 2022, you’d remain on the prior schedule.
    • If you turn 72 in 2023, your first RMD begins in 2024, when you turn 73. Or you may push back your first RMD to April 1st, 2025. Just be aware that you will be required to take two RMDs in 2025, one by April 1st and the second by December 31st, 2025.Starting in 2033, the age for the RMD will rise to 75. 
    • Beginning in 2024, employees enrolled in a Roth 401(k) will not be required to take RMDs from their Roth 401(k). 

We believe the SECURE Act 1.0 and 2.0 updates were long overdue. The new rules recognize that Americans are living and working longer.

  1. RMD penalty relief. Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And 2.0 goes one step further. If the missed RMD is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%.
    • But let’s be clear, while the penalty has been reduced, you’ll still pay the penalty for missing your RMD.
  1. A shot in the arm for employer-sponsored plans. Too many Americans do not have access to employer plans or don’t participate.
    • Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to enroll employees automatically at a rate between 3% and 10% of their salary.
    • The new legislation also allows for automatic portability, encouraging folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out.
    • Employers may offer gift cards or small cash payments to encourage employees to sign up. Think of it as a signing bonus.
    • Employees may opt out of the employer-sponsored plan.
  1. Increased catch-up provisions for employer-sponsored plans. In 2025, 2.0 increases the catch-up provision for those between 60 and 63 from $6,500 in 2022 ($7,500 in 2023 if 50 or older) to $10,000 (the greater of $10,000 or 50% more than the regular catch-up amount). The amount is indexed to inflation.
    • Catch-up dollars must be made into the Roth portion of your plan unless your wages are under $145,000. If your employer does not have a Roth contribution option, catch-up contributions for ages 50 and up will not be available.
  1. Charitable contributions. Starting in 2023, 2.0 allows a once-in-a-lifetime, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. To take advantage of this, you must create one of the aforementioned accounts. Additionally, one must be 70½ or older to take advantage of this provision. If you are interested in utilizing this and would like to open one of these charitable vehicles, please contact your advisor for more details.
    • The $50,000 limit counts toward the year’s RMD.
    • It also indexes an annual IRA charitable distribution limit of $100,000, known as a qualified charitable distribution, or QCDbeginning in 2023
  2. Back-door student loan relief. Starting next year, employers can match employee student loan payments. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement.

Additional provisions

  1. Disaster relief. You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account within three years of the distribution.
  2. Help for survivors. Victims of abuse may need funds for various reasons, including cash, to extricate themselves from a difficult situation. 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free. 
  3. Rollover of 529 plans. Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary, and the 529 plan must be at least 15 years old.
    • In the past, families may have hesitated in fully funding 529s amid fears the plan could be overfunded, and withdrawals would be subject to a penalty. Though there is a $ 35,000 lifetime cap, the provision helps alleviate some of these concerns.

Final thoughts 

We welcome these changes. Many Americans lack adequate savings, and the just-enacted bill helps address some of the challenges many face as they march toward retirement.

We have provided a high-level overview of the SECURE Act 2.0. Keep in mind that it is not all-inclusive. 

We are always here to assist you, answer your questions, and tailor any advice to your needs. Also, feel free to contact your tax advisor with any tax-related questions.

We’ve trust you’ve found this review to be educational and helpful. Once again, let me remind you that it is best to consult with your tax advisor before making decisions that may impact your taxes.

If you have any questions or want to discuss any matters, please feel free to call any of the team members.

Sources: 

  1. [[https://images.thinkadvisor.com/contrib/content/uploads/documents/415/479719/GA_SECURE-2.0-Act-of-2022_Section-by-Section-Summary-FINAL.pdf Secure Act 2.0 Act of 2022]

  2. [[https://www.fidelity.com/learning-center/personal-finance/secure-act-2 SECURE 2.0: Rethinking Retirement Savings]];

  3. [[https://www.schwab.com/learn/story/congress-passes-major-boost-to-retirement-savings Congress Passes Major Boost to Retirement Savings]];

  4. [[https://www.wsj.com/articles/WP-WSJ-0000441889 The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws]]