Upcoming changes - SECURE Act 2.0

The median balance in a 401(k) for Americans aged 65 and up is $87,700 according to Vanguard. There is a problem with a lack of Americans saving for retirement and our government is wanting to change this. 68% of workers have access to a retirement plan in 2021. The purpose of the newly passed Secure Act 2.0 is designed for younger workers to save more while dealing with student debt and older employees who are trying to catch up with their retirement savings.

Savers

1. 529 Plans can be rolled into a Roth IRA. After 15 years from creation, 529 plan assets can be rolled over to a Roth IRA for the beneficiary. This is subject to annual Roth contribution limits. Limited to an aggregate lifetime limit of $35,000. This change is super helpful

1. Student loan debt retirement plan match. In 2024, employers will be able to match employee student loan payments with the matching payments going into a retirement account. This gives workers overwhelmed with student debt the ability to save if they couldn’t afford to contribute to their retirement plan.

1. Defined contribution retirement plans such as a 401k can now add an emergency savings account associated with a Roth account to be used by participants for an emergency. This will hopefully reduce the number of employees who cash out of their plan and set themselves back when saving for retirement.

1. Permits retirement plan service providers to offer plan sponsors automatic portability services. This looks like transferring an employee's low-balance retirement accounts to a new plan when they change jobs. This change is helpful for lower-balance savers who typically cash out their retirement plans when they leave their jobs. This sets them back years instead of being able to continue saving in another eligible retirement plan.

1. In 2024, IRA catch-up contributions for people aged 50 and over will now be indexed to inflation. Meaning that it will now increase every year based on federally determined cost-of-living increases.

1. Higher catch-up contributions. Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make 401k catch-up contributions of up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. (The catch-up amount for people aged 50 and older in 2023 is currently $7,500.)

1. Catch-up Contributions change. If you earn more than $145,000 in the previous calendar year, catch-up contributions must now be made as Roth contributions. This doesn’t apply to those who earned less than $145,000.

Employers

1. Increases the retirement plan start-up credit for small business owners to offset the cost of setting up retirement plans. The three-year small employer startup tax credit would raise to 100% from 50% and include companies under 100 employees up from 50.

1. Changes to the automatic enrollment in retirement plans. The Secure Act 2.0 would require employers with 401(k) or403 (b) plans to automatically enroll all new, eligible employees at a 3% contribution rate increasing by 1% annually until it reaches 10%.

1. Matching for Roth accounts. Employers will be able to provide the option for employees to receive vested matching contributions to Roth accounts. Previously, matching in employer-sponsored plans was required on a pre-tax basis.

1. Small 403(b) plans have lower costs in becoming a MEP. More lax regulations by the new law make it easier for 403(b) plans to join and become a multiple employer plan (MEP).

Retirees

1. Qualified charitable distributions (QCDs) rules are changed. Beginning in 2023, people who are age 70½ and older may elect as part of their QCD limit a one-time gift of up to $50,000. This amount can count toward someone’s RMD which can be huge savings if you currently give to charity. Reach out to us to have one of our financial advisors see if this technique is right for you.

1. RMD age increases. The age to start taking RMDs increases to age 73 in 2023. If you turned age 72 in 2022 or earlier you must continue to take RMDs. If you are turning age 72 in 2023, you aren’t required to take your RMD until the following year.

1. Future RMD age increases. The bill states when the next RMD increase will be. In 2033 it will increase to age 75. This is helpful when doing estate planning because we will know how to best execute Roth conversions for maximum tax savings.

1. Penalty reduced for failing to take an RMD decreases to 25% of the RMD amount, from 50% currently, and even falls to 10% if corrected in a timely manner for IRAs.

1. Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.

Take away

it comes down to helping people save more for retirement, these changes may help but the main driver is education. If you don’t know that these changes happen or how to utilize them, they are worthless. Taking control of your finances, investing consistently, and making sure you aren’t living beyond your means is the best way to feel “secure” for retirement.

If you have any questions about how this new law may affect you, or have any questions, reach out to your Spokane financial advisor or CPA.

About the author

Noah Schwab CFP® is a financial advisor in Spokane, Washington who specializes in helping Spokane small business owners.

• Synergizing business and personal finances

• Setting up retirement plans

• Investment management

Links:

Retirement plan statistics: Link

Article on the SECURE ACT 2.0: Link