Question:
I read that SECURE Act 2.0 has been approved. What does this mean for the evolution of retirement savings?
The SECURE law stands for “Putting every community in place for the improvement of retirement”. The first iteration was signed into law by President Donald J. Trump on December 20, 2019. SECURE Act 2.0 builds on this with new provisions.
The most significant changes further increase the minimum age required for distribution (RMD), switch to automatic enrollment in the scheme and provide new opportunities for matching/emergency withdrawals.
Most of the key provisions will come into force from 2024-2025 with several adjustments such as increasing the age of RMD to 73 years will come into force in 2023. In 2019, the SECURE law increased the age of the RMD from 70 1/2 to 72 with increasing participation. in retirement savings plans through various tax incentives and the relaxation of administrative rules for employer-sponsored pension plans.
SECURE Act 2.0 goes beyond the original with mandatory employer pension plan enrollments and more flexibility in individual use of advantageous savings accounts. The new legislation also extends the time limit for savings before RMDs are required to 75 by 2033. The changes will be phased in over a period of years and are expected to increase participation and interest in savings schemes -retreat.
The changes are not limited to higher RMD ages and the move to automatic enrollment for new pension schemes, but also incorporate an allowance for matching contributions to be made for student loan repayments (increasing savings -young adult retirement), higher catch-up limits for those aged 60-63, and additional opportunities for penalty-free withdrawals/reduced penalties for missed RMDs that are corrected.
Detailed descriptions of key provisions as follows:
* Automatic registration: Eligible employees should be automatically enrolled in the new 401(k) and 403(b) retirement savings plans with a contribution of between 3 and 10%, increasing by 1% per year (up to 15%) unless employees do not withdraw. Automatic registration is effective from 2025.
* Higher RMD age: The RMD age is raised to 73 years in 2023 and 75 years from 2033.
* MEP and PEP access for 403(b) plans: Access to Multi-Employer Plans (MEPs) and Pooled Employer Plans (PEPs) is expanded to include 403(b) plans.
* Matching contributions for employee student loan repayments: Plan sponsors can make matching contributions to 401(k), 403(b), and simple IRA plans for qualified student loan repayments made by employees beginning in 2024.
* Expanded emergency expense distribution allowances: Emergency distributions of up to $1,000 are permitted for unforeseeable or immediate financial needs related to personal or family emergency expenses once a year, to be repaid within three years (beginning in 2024).
* 529 Tax and Penalty Free Rollover to Roth IRA: Beneficiaries of 529 college savings accounts are allowed to transfer up to $35,000 from a 529 account in their name to a Roth IRA account. Rollovers are subject to annual IRA contribution limits and are available for 529 accounts that have been open for more than 15 years. Rollovers are allowed from 2024.
* Reduced penalty for failing to take RMD: A tax penalty of 50% for failure to take RMD is reduced to 25%. For IRAs, the tax is further reduced to 10% if corrected. The reduction is effective as soon as the invoice is signed.
* Higher catch-up contribution reductions: For people aged 60 to 63, the catch-up contribution limit is increased to the greater of $10,000 or 50% more than the regular catch-up amount. The higher allocation is effective from 2025.
* Emergency withdrawals for victims of domestic violence: Emergency withdrawals for expenses of people fleeing domestic violence situations are provided at the lesser of $10,000 or 50% of the account value, to be repaid over three years with a refund of income tax paid on the amount refunded. Withdrawals authorized from 2024.
* Emergency withdrawals for disaster relief: Withdrawals of up to $22,000 from employer retirement accounts or IRAs are permitted for those affected by a federally declared disaster. These emergency-related withdrawals are permitted for disasters occurring on or after January 26, 2021.
* Expanded administrative expense tax credit for new businesses: A 50% tax credit for administrative costs incurred by new businesses is increased to 100% for businesses with 50 or fewer employees from 2023.
* Incentives offered by the employer: De minimis financial incentives (such as gift cards or other financial rewards) are permitted for sponsors’ efforts to boost employee participation in retirement savings plans, effective upon signing the bill .
With these changes underway, it’s more important than ever to work closely with your team of trusted financial advisors in your retirement planning. Stay focused and plan accordingly.
Opinions expressed are those of the author as of January 2, 2023, but not necessarily those of Raymond James and Associates, and are subject to change at any time based on market conditions and other factors. Raymond James financial advisors do not provide advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if made before age 59.5, may be subject to a 10% federal penalty tax. Contributions to a traditional IRA may be tax deductible depending on the taxpayer’s income, tax status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if made before age 59.5, may be subject to a 10% federal penalty tax. Like traditional IRAs, contribution limits apply to Roth IRAs. Additionally, with a Roth IRA, your allowable contribution can be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be entirely exempt from income tax.
“Certified Financial Planner Board of Standards Inc. holds the CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque) and CFP® (with flame) certification marks in the United States, which it awards to individuals who pass the CFP Board’s Initial and Ongoing Certification Requirements This article was provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401 , Marco Island, FL 34145. She can be reached at (239) 389-1041, email [email protected] Website: www.raymondjames.com/Darcie.