Secure Act 2.0 Update

 
The Economy, Wealth Management February 9, 2023

Secure Act 2.0 Update

The SECURE ACT 2.0, signed into law December 29, 2022, made several rule changes that impact retirees and those saving for retirement. The provisions of the retirement package were included in a spending bill that contains 4,155 pages and it builds on the first SECURE ACT which was approved by Congress in 2019.

Here are the key takeaways:

  • The age to start taking RMDs increases to age 73 in 2023 and to 75 in 2033.

The most notable provision of this bill from a financial planning perspective is the increase in the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account from age 72 to 73. The new RMD age applies to anyone who turns 72 on or after January 1, 2023. In 2033, the RMD age will increase again to 75.

  • The penalty for failing to take an RMD will decrease to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs.

Under the new law, penalties for missing or underestimating RMDs will be reduced. Failure to take the proper RMD from a retirement plan used to include a penalty of 50% of the shortfall. Beginning this year, the penalty is reduced to 25% or to 10% (if the individual corrects the issue within two years).

  • Catch-up contributions will increase in 2025 for 401(k), 403(b), governmental plans, and IRA account holders.

Beginning January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. (The catch-up amount for people age 50 and older in 2023 is currently $7,500.) If you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.

  • Individuals can roll up to $35,000 from a 529 account to a Roth IRA in the name of the student beneficiary. The 529 account must have been in existence for at least 15 years. That provision becomes effective in 2024.

After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit.

  • Qualified Charitable Distributions

The new law also makes two notable changes to the Qualified Charitable Distribution (QCD) rules. The provision allows for individuals over 70 ½ to make a one-time election of up to $50,000 for a charitable distribution to a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity. And, beginning in 2024, the overall QCD limit of $100,000 will be indexed to inflation so that it will likely increase a modest amount each year.

Other notable provisions include:

  • The creation of a “retirement savings lost and found” national database to help individuals find their benefits if they changed jobs, or if the company they worked for moved, changed its name or merged with a different company.
  • Individuals can withdraw up to $22,000 from an employer-sponsored plan or an IRA for federally declared disasters.
  • Beginning in 2024, employers have the option to match student loan payments with a contribution to the employee’s retirement plan account. The goal is to help workers who are burdened by student loans and cannot afford to make a contribution to their retirement plan by ensuring that they are accumulating some retirement savings even as they pay down their loan.
  • Employers will also have the option to allow employees to create “rainy-day funds” in their retirement plan. Individuals would then be able withdraw up to $1,000 from the plan penalty-free for emergencies. The provision addresses a concern that spiked during the pandemic, when employers saw a big increase in the number of employees who were tapping their retirement accounts to cover unexpected expenses.
  • Long-term part-time workers will become eligible for their company’s retirement plan after two consecutive years with at least 500 hours of service. Previous law required three years of service.

 

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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