The Securing a Strong Retirement Act of 2022, also known as the SECURE 2.0 Act, was signed into law on December 29, 2022 by President Biden. It’s the largest retirement bill in over 15 years, covering everything from automatic 401(k) retirement plan enrollment to emergency expense withdrawals. It has over 90 new retirement plan provisions.
The CERTIFIED FINANCIAL PLANNER™ professionals at Morris Financial Concepts, Inc. have taken a look at SECURE 2.0 and how it changes the landscape for retirement planning. Listed below are some of the biggest changes and notable points that will affect your future planning:
Delayed Required Minimum Distribution
As of 2019, retirees were required to begin withdrawing from their retirement accounts starting at age 72. The idea behind this requirement was that the money set aside for taxpayers’ retirement would actually be spent by retirees, not just saved up indefinitely and passed along into the estate for their beneficiaries.
Under the SECURE 2.0 Act, the age at which taxpayers with retirement accounts must start taking required minimum distributions (RMDs) increases to 73 years old starting in 2023, and it will further increase to age 75 in 2033. If you were already taking distributions because you turned 72 in 2022, you will continue your required distribution in 2023.
Retirement plans with RMDs include:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) retirement plans
- 403(b) plans
- 457(b) plans
- Profit sharing plans
- Other defined contribution plans
Higher Catch-Up Limits
Under the previous arrangement, employees over 50 years old could make catch-up or additional contributions to their retirement plans beyond the amount typically allowed per year. Under the SECURE 2.0 Act, IRA contributions will increase by the existing $1,000 amount, and an index will be added beginning in 2024. This new law increases these catch-up amounts even more for individuals who have reached the ages of 60, 61, 62, and 63. Effective in 2025, these new catch-up amounts will also be indexed for inflation.
Federal Tax Credit Becomes a Savers’ Match
Under current law, a taxpayer can be given a non-refundable tax credit for contributing to a retirement account. The new law changes the tax credit to a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement account. You’ll have to wait until 2027 to have the IRS put a contribution into your IRA, and just like the current law these are phased out as more money is made.
Student Loan Payments Qualify for Employer Match
Often individuals still struggling to pay back their student loans find it difficult or impossible to contribute to retirement accounts. This sets them up at a disadvantage, making them miss out on employers’ matching contributions for a good portion of their careers and making it hard to accumulate the necessary savings for eventual retirement.
Starting in 2024, the SECURE 2.0 Act will treat qualified student loan payments as retirement plan contributions that their employer can match. Under this arrangement, workers can start saving with enough time to build up a healthy nest egg before retirement comes knocking.
Automatic Enrollment in 401(k) Retirement Plan
Most retirement planners will advise their clients to sign up for a 401(k), but workers without an advisor at hand may still miss out on this valuable retirement planning strategy. Historically, taxpayers have had to opt-in in order to participate in a 401(k) retirement plan, and without the knowledge or guidance to take that extra step, they could lose the opportunity for essential savings.
Starting in 2025, the SECURE 2.0 Act will flip this arrangement around. Businesses will be required to automatically enroll workers in 401(k) retirement plans, with the exception of small or brand-new businesses and church or government institutions. Employees will still have the option to opt out if they choose, while those who just never knew to ask will participate in the retirement plan.
Benefits for Military Spouses and Small Businesses
Military spouses often have to move around so much that they don’t get to take full advantage of the company’s retirement plan and employer contributions. Within this law there is a tax credit of up to $500 for businesses if they 1) allow military spouses to participate in the retirement plan within 2 months of hire, 2) once able to participate, make the military spouse eligible for any matching or non-elective contributions, and 3) have the military spouse be 100% vested on all employer contributions.
Emergency Expense Withdrawals
Early withdrawals from a 401(k) retirement plan typically result in a 10% penalty tax on top of the income tax, making them a last resort only when taxpayers are in need of additional savings before retirement. Under the SECURE 2.0 Act, taxpayers will be able to take one penalty-free withdrawal from their 401(k). They have the option to pay it back in 3 years, and no additional withdrawal is allowed unless it is paid back. After it is paid back, another withdrawal may be considered.
Savings Accounts as Part Of Individual Plans
To encourage participation and teach good savings principles for emergencies, SECURE 2.0 puts into place the ability to have a pension-linked emergency savings account. Up to 3% of an employee’s salary may be put into a savings account that is capped at $2500. After the cap is reached, the employee may continue to contribute to a ROTH 401(k). The contributions to the savings account are treated as elective deferrals for purposes of employer matching.
529 Plan Conversion to Roth IRA
The IRC 529 plan is a savings plan that covers qualified education expenses. In the past, 529 plan distributions that weren’t spent on eligible education expenses were subject to income taxes and the 10% distribution penalty. The SECURE 2.0 Act changes that standard. Instead, it will allow up to $35,000 of a 529 plan balance to be converted to a Roth IRA. This change will take effect starting in 2024.
Plan for the Future with Morris Financial Concepts, Inc
The retirement planners at Mt. Pleasant’s Morris Financial Concepts are keeping a close eye on the SECURE 2.0 Act and all of the nuances it has to offer for your retirement planning. With our guidance, you can increase your retirement benefits and plan for a retirement that provides for you and your family. Reach out to our team today to speak with an advisor.
The opinions expressed herein are those of Kyra Morris at Morris Financial Concepts, Inc. (“MFC”) as of the date of publication and are subject to change without notice. Nothing contained herein is intended to be investment advice. Some information used derives from outside sources that MFC believes to be reliable, however accuracy and completeness cannot be guaranteed. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. MFC-23-01
Certified Financial Planners (CFP®) are licensed by the CFP® Board to use the CFP® mark. CFP® certification requirements include: Bachelor’s degree from an accredited college or university, completion of the financial planning education requirements set by the CFP® Board (www.cfp.net), successful completion of the CFP® Certification Exam, comprised of two three-hour sessions, experience requirement: 6,000 hours of professional experience related to the financial planning process, or 4,000 hours of Apprenticeship experience that meets additional requirements, successfully pass the Candidate Fitness Standards and background check, agree annually to be bound by CFP® Board’s Standards of Professional Conduct, and complete 30 hours of continuing education every two years, including two hours on the Code of Ethics and Standards of Professional Conduct.