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SECURE 2.0 Act: What You Need to Know

By: Nestor Caballero CPA

Saving for retirement just got a little easier. The long-awaited SECURE 2.0 Act, which was signed into law at the end of 2022, continues where the original SECURE Act of 2019 left off, enhancing the benefits of IRAs, 401(k) plans, and other tax-advantaged savings accounts. Here are some of the highlights:

Distributions Delayed

The longer your savings grow on a tax-deferred or tax-free basis, the more wealth you create. SECURE 2.0 helps you save longer by increasing the age at which required minimum distributions (RMDs) from certain retirement accounts must begin, first to 73 and then to 75. The following table shows the various RMD starting ages, based on when you were born.

If you were born: ////////Your RMDs start at age:

Before July 1, 1949//////// 70 1/2

From July 1, 1949, through December 31, 1950 ///////72

From January 1, 1951, through December 31, 1959 ///////73

On or after January 1, 1960///////// 75

Note: An apparent drafting error, which Congress is expected to correct, creates some ambiguity over when RMDs begin for certain taxpayers. The dates in the table are believed to be what Congress intended.

If your 72nd birthday is in 2023, your first RMD won’t be due until April 1, 2025. If you already scheduled a distribution for 2023 or early 2024 based on prior law, consider rescheduling it.

The act also conforms the treatment of employer-sponsored Roth accounts to the current treatment of Roth IRAs. Beginning in 2024, RMDs will no longer be required from these accounts.

RMD Penalties Reduced

SECURE 2.0 reduces the penalty for missed RMDs from 50 percent to 25 percent of the distributable amount. And taxpayers who correct a missed RMD on a timely basis can reduce the penalty to only 10 percent.

Catch-Up and Matching Contributions Increased

Under current law, if you’re 50 or older, you can make catch-up contributions of an additional $1,000 to IRAs and an additional $7,500 to most employer-sponsored plans. Starting next year, catch-up contributions to IRAs, which have been stalled at $1,000 for many years, will be adjusted for inflation. For employer plan participants approaching retirement age, catch-up contributions will soon get even better. Starting in 2025, participants aged 60 through 63 will be able to boost their contributions by the greater of $10,000 or 150 percent of the regular catch-up amount.

The act did place one limit on catch-up contributions to employer-sponsored plans, however. Starting in 2024, if your wages from the plan sponsor exceed $145,000 (adjusted for inflation), you’ll have to make catch-up contributions to a Roth account. In other words, these contributions will no longer be deductible.

SECURE 2.0 also made some improvements to employer matching contributions. Now, if permitted by the plan, employees may receive their employer matches as Roth contributions. And plans are permitted to treat certain student loan payments as contributions for matching purposes.

Other Changes

SECURE 2.0 makes several other changes designed to improve retirement savings, including:

·         Expansion of qualified charitable distributions (QCDs) from IRAs. QCDs allow people 70 ½ or older to transfer up to $100,000 tax-free directly from an IRA to a qualified public charity and to count that amount toward their RMDs. Now, it’s possible to make a one-time QCD up to $50,000 to a charitable gift annuity or charitable remainder trust that provides you with a lifetime income stream.

·         Relief for overfunded Section 529 college savings plans. Withdrawals used for noneducational purposes are normally subject to taxes and penalties. But SECURE 2.0 allows you to roll over up to $35,000 (lifetime per beneficiary) to Roth IRAs for each beneficiary, if certain requirements are met.

·         Hardship withdrawals. For certain disaster-related economic losses, employer plans may allow participants to withdraw up to $22,000 penalty-free. If the withdrawal is repaid within three years, it escapes income tax as well.

·         Emergency savings accounts. Beginning next year, employers will be allowed to set up emergency savings accounts, linked to a 401(k) or similar plan, for rank-and-file employees. These plans may only accept employee after-tax contributions (although they count for purposes of matching contributions to the linked plan), and their balances cannot exceed $2,500.  Withdrawals — which must be permitted at least once per month — are tax- and penalty-free.

Review Your Retirement Plan

In light of these and other changes made by SECURE 2.0, it’s a good idea to review your retirement plan and make adjustments if appropriate.