What the SECURE 2.0 Act Means for You

Date: January 23, 2023
Category: Financial Planning, Retirement Planning

Among all the year-end political drama and holiday celebrations you participated in, you may have missed the news that the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was signed into law as part of the $1.7 trillion dollar spending bill signed by President Joe Biden. Intended to help strengthen the retirement prospects of millions of Americans, the new legislation could be a big game changer for investors and retirees in many ways. While there are many provisions to the new law, let us focus our attention on some of the more important aspects.

Required Minimum Distributions (RMDs)

The recent changes to Required Minimum Distributions may capture most of the headlines because these delays provide additional flexibility to retirees to control the taxation of their retirement income. The SECURE Act 2.0 gradually increases the age for required minimum distributions to 75 over the next decade. Beginning on January 1, 2023 the new RMD age increases from age 72 to 73, but only for those who will turn 72 years old in 2022 or later. The next phase of the legislation kicks in ten years later in 2033, when the RMD age increases to age 75. Another provision of the SECURE Act 2.0 will positively impact retirees, albeit with a slight delay. Starting in 2024, RMDs will no longer be required from Roth accounts in employer-provided retirement accounts. This allows retirees to continue to build wealth in a tax-free Roth account longer.

Roth Employer Matches

Thanks to the SECURE Act 2.0, employees can now elect to receive their employer-provided vested matching contributions to their 401(k) accounts in their Roth accounts. Previously, matching contributions were only permitted to be made to traditional pre-tax accounts. This is a great opportunity for 401(k) and other employer plan participants who want to emphasize building up Roth accounts, regardless of their income level. There are a few things to weigh as you consider receiving Roth employer matches. First, does your employer even offer a Roth account in your 401(k)? Not all 401(k) plans have Roth accounts today, but you can expect to see that change soon, in part because of SECURE 2.0. Secondly, Roth employer matches will be treated as taxable income to the recipient, unlike traditional matches which are received pre-tax. This could result in nasty surprises come tax time for unwitting 401(k) plan participants. Finally, there could be significant delays for plan providers to offer this and for payroll systems to be updated.

SIMPLE and SEP Roth IRAs

Beginning in 2023 small business owners and their employees are allowed to make Roth contributions to SIMPLE and SEP IRAs. Previously, only pre-tax contributions to these accounts were permitted. Employees can now elect Roth employer contributions as well. This new provision is great news for business owners and high-earning employees who have high incomes, making them ineligible to contribute to Roth IRAs. The new law takes effect immediately, but delays in actual implementation are very likely as plan recordkeepers and account custodians are probably not prepared for the changes because of the last-minute approval of the SECURE 2.0 Act.

As is the case with 401(k)s as mentioned above, taxpayers should be aware that any Roth employer contributions will be counted as taxable income in the year the Roth contribution is made.

529 Plan Owners Have New Distribution Options

Starting in 2024 unused assets in 529 accounts can be rolled over to a Roth IRA. There are two important conditions to keep in mind, however. First, there is an aggregate $35,000 lifetime limit on the rollover amount. Secondly the 529 account must be at least 15 years old to qualify to roll the assets over. The new provision eliminates some of the reasons that parents have not contributed more to 529 education savings accounts in the past.

Student Loan Repayments

Another provision of the SECURE 2.0 Act that begins in 2024, employers will have the ability to match employees’ student loan payments with matching 401(k) contributions. This could give workers a big incentive to save for retirement while paying off student loans and is much more palatable to taxpayers than student loan forgiveness plans administered by the federal government.

Emergency Fund Savings

Beginning in 2024, defined contribution retirement plans will be able to add an emergency savings account. Non-highly compensated employees will be able to contribute up to $2,500 into designated Roth accounts to create emergency savings for the employee. The first four withdrawals in a year will be both tax and penalty-free. Depending on the plan rules, employee contributions might be eligible for an employer match.

The numerous provisions of the SECURE 2.0 Act offer tremendous opportunities for Americans whether they are in the wealth accumulation or wealth preservation phase of their life. As we noted above, the start dates for parts of the act start at different times, and not all parts of the act apply to everyone. Be sure to schedule a review meeting with Bollin Wealth Management to discuss the impact of the SECURE 2.0 Act on your financial plan.

Sources: Wall Street Journal, Investment News, forbes.com, finance.senate.gov