SECURE 2.0 Act - Retirement Investors

GOOD NEWS FOR RETIREMENT INVESTORS

Individuals will find a lot to like in the SECURE ACT 2.0, especially pertaining to retirement security. Be aware that limits and restrictions apply and that some 401(k) and 403(b) plans may not offer all of the new features. Even those employers that wish to adopt these new features will find it takes time to incorporate them into retirement plan documents.

RMD AGE RISES

The age at which required minimum distributions (RMDs) must start rises from age 72 to 73 in 2023, to 74 in 2029 and to 75 in 2033. Failure to take RMDs will result in a 25% penalty tax of the RMD not taken – half of what it was before this year. But you won’t have to take RMDs at all if you have less than $100,000 in retirement assets. And, if you have more than $100,000 and you quickly rectify tripping up on RMDs, the penalty may be as low as 10%.

ROTH 401(K)’S DITCH RMDS

Beginning in 2024, Roth 401(k) distributions will no longer have the same RMD requirement as other non-Roth accounts do, a big selling point to more affluent workers who want to delay withdrawals past age 73 (or 75) and later.

CATCH UP FASTER

Previously, you could contribute up to an extra $6,500 a year to your 401(k) plan at age 50 and older. That limit increases to $7,500 and, if you are age 60 to 63, it increases to an extra $10,000 starting in 2025. This will be indexed to inflation in 2026. However, if you earned $145,000 or more during the previous year, catch-up contributions won’t be tax-deductible and must be put into an after-tax account. The wage limit is indexed to inflation in 2025. Catch-up contributions to SIMPLE accounts will also increase and be indexed to inflation.

QLAC LIMIT INCREASES

You can now move up to $200,000 from $145,000, indexed to inflation, from a traditional IRA into a qualified longevity annuity contract (QLAC). That’s a significant increase. IRA owners buying QLACs can delay distributions from them up to age 85, allowing more time for potential tax-deferred growth than traditional RMDs. The cap of 25% of IRA account assets is also eliminated.

NEW CHARITABLE TAX BENEFIT

SECURE 2.0 also gives donors age 70½ and older in 2023 a one-time opportunity to create a life income plan, typically in the form of a charitable gift annuity or charitable remainder trust. The limit is $50,000, indexed to inflation starting in 2024. You may also make a qualified charitable donation of up to $100,000 from a traditional IRA to a qualified 501(c)(3) charitable organization. There are many rules and restrictions for both these and QLACs, so consult your accounting and legal professionals.

NEW ROLLOVER OPPORTUNITY

Starting in 2024, Roth IRA owners can convert unused 529 savings plan money, up to a $35,000 lifetime limit, into their Roth accounts, tax-free and penalty-free. Restrictions apply, including one that mandates that the 529 plan be at least 15 years old.

MORE OPTIONS FOR EMPLOYEES

Employers may now contribute to the retirement accounts of those employees’ who are paying student loans. Another feature allows withdrawals before age 59½ of up to $1,000 for emergencies, penalty-free. Employers may also establish emergency savings accounts to which employees can contribute up to $2,500.

NEW PLAN RULES FOR PART-TIMERS

Secure 2.0 makes it easier for part-time workers to contribute to an employer-sponsored retirement account. The original Secure Act made it so part-time workers who work between 500 and 999 hours for three consecutive years could be eligible for their company’s 401(k). The new rule keeps the hourly requirement, but reduces the number of consecutive years to two.

NEW SAVER'S MATCH

In 2027, the Saver’s Credit for lower-income taxpayers becomes a Saver’s Match of 50% of contributions up to $2,000.

AND THERE'S MORE

Effective immediately, the 10% early withdrawal penalty on distributions to terminally ill participants is eliminated and repayment of birth or adoption distributions is limited to three years. In late 2025, distributions up to $2,500 to pay for long-term care insurance premiums will become penalty-free.