What you need to know about the Secure Act 2.0
It’s no secret that a majority of retirement account balances in this country are modest at best and are not going to meet the needs of most retirees. This bill sets to address Americans working longer, incentivizing younger people to save more and provide more access to retirement plans.
According to the Bureau of Labor Statistics by 2030, the number of people age 75 years and older who will be working or looking for work is expected to grow by 96.5%. This is not too surprising given data released by Vanguard puts the median balance in a 401k for Americans age 65 and up at $87,700. Quite frankly, the numbers are startling.
Catch-up contributions
In order to hopefully boost these numbers, the bill increases the “catch up contribution” for those who are age 50 and older to $7,500 annually towards their defined contribution plans in 2023 and starting in 2025 that limit increases to $10,000. The special catch-up contribution provision for ages 60-63 begins in 2025 and is the greater of $10,000 or 50% more than the regular catch-up amount. This figure may increase by 2025 for inflation. Regular contributions and catch-up contributions for SIMPLE IRA plans will also be increasing by as much as 10% in 2024.
Currently, IRA’s have a catch-up provision of $1,000 annually for those ages 50 and above which is going to be indexed for inflation starting in 2024.
There is one new caveat to allowing extra money being stashed away. In 2024, if your compensation is over $145,000 during the previous year, the act requires all catch-up contributions for individuals to be deposited into a Roth account.
RMD
In addition, the bill also raises the Required Minimum Distribution age from 72 to 73 on January 1 2023 and to age 75 in 2033. To break that down even more, if you were born between 1951-1959 your RMD age is now 73 and for those born in 1960 and later your RMD age is now 75. If your spouse dies before reaching RMD age starting in 2024, the surviving spouse is now able to delay RMD distributions from the inherited account until they reach RMD age instead of taking them when the deceased spouse turned RMD age. The penalty for missing an RMD is also being reduced from 50% to 25% and possibly down to 10% if you address it in a timely fashion and the IRS is in a good mood. In 2024, employees who have a Roth 401k will not have to take RMDs. Qualified charitable distributions also known as QCD’s will be indexed for inflation beginning in 2024 and will increase from the current limit of $100,000.
Savings Incentives
According to PricewaterhouseCoopers, 1/3 of Americans do not have access to a private retirement plan like a 401k. If you own a small business the legislation expands tax incentives to start a company 401k plan by simplifying the requirements. Beginning in 2025, employees at companies who are starting a new savings plan will be automatically enrolled, unless they opt out, and would see their contribution amount being increased automatically on an annual basis. Plans will start at a 3% contribution rate and be increased by 1% annually.
If you are a part time worker, you will no longer be required to work three consecutive years to be eligible for your company's savings plan. Instead you need to work between 500-999 hours for two consecutive years to be eligible to participate.
Low-income workers may qualify for a “savers match” from the federal government of up to 50% of $2,000 in contributions for a maximum match of $1,000 per individual. The phase out starts at $41,000 - $71,000 for couples MFJ and $20,500-$35,500 for single filers.
If you are making student loan payments, your employer can start matching your payments in 2024 as a contribution into your retirement plan. Your student loan payments would count towards your annual contribution limit. If you cannot make retirement contributions because your student loan payments are too high, this is a way to save for retirement while you pay down your loans. Currently federal student loan payments are on pause until June 2023 as the debt forgiveness is currently on hold battling court challenges.
In addition to retirement savings, employers will be allowed to auto enroll employees (unless they opt out) into a “rainy day” fund. Employees can save up to $2,500 per year on an after-tax basis and withdrawals would be tax free. Think of this as a Roth savings account without the retirement restrictions!
Retirement withdrawals
According to a consumer financial services company called Bankrate, currently 51% of Americans can’t pay for more than 3 months of expenses through an emergency fund and 25% say they do not have an emergency fund at all. Emergencies happen, and retirement withdrawals for “unforeseeable or immediate financial needs” are going to get a bit easier.
In 2024, if you can take a distribution of up to $1,000 annually from your retirement savings account without being subjected to the usual 10% early withdrawal penalty. If you do not pay the distribution back within a certain amount of time, you will not be able to take another one for 3 years. Victims of domestic abuse can withdraw up to $10,000 penalty free and individuals affected by federally declared disasters can take up to $22,000.
529 Plan Updates
One of the biggest changes in the Secure act also begins in 2024 with a provision to existing and future 529 plans. Once a 529 plan has been opened for at least 15 years in the name of a student beneficiary, you can rollover up to $35,000 into a Roth IRA in the student's name. The $35,000 is a lifetime amount and annual limits for the rollover must be within annual Roth IRA contribution maximums.
The new Secure Act contained more than 100 provisions that impacted retirement and savings accounts.
We are only discussing the ones that we think affect clients most. If you have questions on how this relates to your specific situation, please do not hesitate to schedule an appointment with us by booking a call below.
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