What Does The SECURE 2.0 Act Mean for Your Retirement?

The SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement) was recently signed into law.  SECURE 2.0 has the goal of improving retirement savings options and building on SECURE 1.0, passed in 2019. The Act contains 92 new provisions that cover multiple retirement savings areas.  And, as exciting as it would be to go over all 92 changes, we have chosen instead to highlight those that are going to be most impactful for HCM clients. Some of these changes have already gone into effect (starting January 1, 2023) while others start in 2024, 2025, and beyond. As always, please reach out to your HCM Advisor if you have any questions about how a certain aspect of the Act may impact you and your family.

Required Minimum Distributions (RMDs)

Several changes have been made to RMDs, the most notable being a change to the age that RMDs are required to begin. Between the years 2023-2032, the age to begin taking RMDs has increased to 73. Starting in 2033 and beyond, the RMD age is increasing further to 75. This change will not impact those who are currently receiving required annual distributions from IRAs, 401(k)s, etc.

In 2023, this change will work as follows:

1. If you have already started taking RMDs because you turned 72 before 2023, you will continue taking RMDs each year. This change will not impact you.
2. If you are turning 72 years old this year, you will not be required to take an RMD and will instead begin your RMDs in 2024. No one will begin RMDs in the year 2023.

Another provision that will impact RMDs will start in 2024 for those who are married. There will now be a new post-death option for surviving spouse beneficiaries when it comes to RMDs. If the account owner passes away and the spouse is the listed primary beneficiary, the spouse will have the option to be treated as the decedent for RMD purposes. This means that the RMD would be delayed until the deceased spouse would have reached RMD age. This change is a unique planning opportunity and can have a big impact when it comes to tax planning if the surviving spouse is older than the deceased. 

Finally, the penalty for not taking an RMD has now been reduced from 50% to 25%. There is also a “correction window” that applies where the penalty can be reduced even further to 10%. While it is uncommon, it is not unheard of for someone to forget to take their RMD (especially from inherited IRAs). If you have an account outside of HCM that needs to have an RMD taken and you forget to do so, please contact your Wealth Advisor immediately and we will work with you to ensure that the issue is resolved as quickly as possible. 

Qualified Charitable Distributions (QCDs)

Qualified Charitable Distributions are a means of satisfying your RMD requirement by donating funds to charity.  Starting in 2024, the amount that can be used for QCDs is going to be indexed for inflation. This is similar to how contribution rates can increase from year to year in IRAs, 401(k)s, etc. The current limit is $100,000 per year that can be used for QCDs.   The age at which one can make QCDs remains 70.5 even though the RMD age is increasing.  This creates tax planning opportunities for those wishing to make charitable gifts who are not eligible to itemize.

Roth IRA & 401(k) Related Changes

There are many changes that are coming regarding Roth contributions, ranging from how a Roth is handled in workplace plans like the 401(k), to entirely new account types being created to give more individuals access to Roth contributions.  

1. Starting in 2024, there will no longer be RMDs required from Roth contributions in workplace plans. In the past, RMDs have been required from these types of plans, as opposed to the Roth IRA which does not require an RMD to be taken annually. Keep in mind that RMDs will still be required from workplace plans from pre-tax contributions in the account.
2. Starting immediately, employers will now be able to provide a company match in the form of Roth contributions. Because taxes are paid on Roth contributions at the time of the contribution into the plan, these matching contributions will be included as part of the employee’s gross income for that year. There are still a few questions that the IRS must clarify regarding these types of contributions, which we will incorporate into our planning as they become available.
3. Starting in 2024, for employees that make over $145,000 annually, catch-up contributions into a workplace plan will be required to be made as Roth contributions. This represents a significant change, with substantial tax implications for anyone planning to make catch-up contributions in 2024 or after. If you must make catch-up contributions to your workplace plan, make sure to discuss this with your HCM Wealth Advisor.
4. Finally, regarding Roth accounts, parents will now be able to transfer a portion of what has been saved in 529 accounts for college education into a Roth IRA. To do this, the Roth IRA must be in the same name as the beneficiary of the 529 account, there is a lifetime maximum of $35,000 that can be transferred to the IRA, and the 529 account must have been opened for at least 15 years. There are additional rules surrounding this new provision, however, this could be a great long-term planning opportunity to transfer wealth within a family.  Please reach out to your Advisor if you’re interested in pursuing this option.

New Catch-Up Contribution Limits 

There are two noteworthy changes regarding catch-up contribution limits. First, Traditional IRA catch-up contributions are now indexed with inflation. This means that we will see the additional amount that can be put into an IRA increase over time instead of remaining fixed at $1,000 a year. This was the only catch-up contribution limit that was not indexed with inflation across retirement plans. Second, starting in 2025, there will be a special catch-up contribution for individuals who are between 60-63 years old. This special catch-up applies to 401(k) and similar type plans. The amount will be the greater of $10,000 or 150% of the current catch-up contribution limit. For example, the special catch-up in 2023 would be $11,250 which is 150% of the current catch-up amount ($7,500).

The SECURE ACT 2.0 contains many additional changes to the law, some quite complicated. Additionally, some of these changes have created questions that must be clarified by the IRS before they can be fully implemented. We will continue to follow these changes as they develop and will keep you informed. If you have any questions on what you have read here or elsewhere about the SECURE 2.0 Act, please don’t hesitate to reach out.