How the SECURE Act 2.0 Affects Your Retirement Savings

by | Jun 6, 2023

As 2022 came to a close, our lawmakers delivered a holiday gift in the form of the SECURE Act 2.0. This new law builds on the 2019 SECURE Act that made changes to the way we save for retirement. The changes enacted with the new law help empower savers to reach retirement goals, with better access to savings before retirement and more flexibility in required distributions after retirement. Here are some of the major new provisions included in SECURE Act 2.0. Many of these provisions are effective immediately, while some start in 2024 and later.

Delayed RMDs  

One of the most impactful provisions of the SECURE Act 2.0 was to increase the age when you must begin taking distributions from your retirement account. This change delays required minimum distributions (RMDs) to age 73 beginning in 2023 and age 75 beginning in 2033. If you were born before 1951, you are already subject to RMDs and must continue taking them. Although the age when distributions are required has increased for many, delaying distributions may result in higher taxes later. It’s important to work with your tax advisor to determine the best distribution strategy for you. 

Inflation-adjusted QCDs  

Since 2006, qualified charitable distributions (QCDs) have allowed you to direct up to $100,000 of withdrawals from your IRA to charity at age 70 ½. The $100,000 limit hasn’t been changed for inflation over the last 17 years. Now beginning in 2024, the $100,000 limit will increase annually with inflation. 

Reduced RMD penalty  

The penalty for failing to follow the complicated RMD rules used to be 50% of the RMD not taken. The tax penalty is now reduced to 25% and is further reduced to only 10% if the erroneous IRA distribution is corrected.  

Penalty-free early withdrawals

Currently, if you withdraw from your retirement plan before age 59 ½, a 10% penalty is assessed with limited exceptions. The SECURE Act 2.0 expands the exceptions to include terminal illness, disaster relief and domestic abuse. An exception is also allowed for withdrawals up to $2,500 to pay premiums on certain long-term care contracts. Emergency distributions of up to $1,000 are permitted starting in 2024 for unforeseeable or immediate financial needs relating to personal or family emergency expenses once per year, to be paid back within three years.  

Increased catch-up contributions

Catch-up contributions allow people aged 50 and over the opportunity to contribute more than the standard maximum to their retirement plans. The SECURE Act 2.0 increases the catch-up contributions in 401(k) and 403(b) plans from $6,500 a year to $7,500 if you are age 50 -59 and to $10,000 a year if you are ages 60 to 63 (beginning in 2025). SIMPLE Plan participants will have their catch-up increased to $5,000. Catchup contributions must be made on an after-tax basis unless you earn $145,000 or less. 

Automatic enrollment

Eligible employees are required to be automatically enrolled in the new 401(k) and 403(b) retirement savings plan with a contribution between 3% and10%, rising by 1% annually (up to 15%) unless employees opt out. Automatic enrollment is effective starting 2025.  

Rollover of 529 Plan balances to Roth IRAs

Subject to certain restrictions, you can now roll as much as $35,000 of leftover 529 Plan balances to a Roth IRA for the beneficiary. This minimizes concerns of overfunding a 529 Plan.

Expanded Roth options  

Previously, SIMPLE and SEP plans could only include pre-tax contributions. Now, both types of plans can provide a Roth contribution option. Also, employers are now permitted to deposit their matching 401(k) and 403(b) contributions to employees’ Roth accounts. And Roth 401(k)s will no longer be subject to RMDs starting in 2024.  

Tax credits for small business 401(k) plans

SECURE Act 2.0 removes cost barriers for small businesses with 1 to 50 employees to start a 401(k) by providing tax credits for plan setup and administration costs. Further enhancing the benefit for small business 401(k)s, tax credits are also now available for employer matching contributions, subject to limitations. This is just a sampling of the many provisions in SECURE Act 2.0. While the Act is chockfull of other retirement-related changes, those included here will likely to be the most relevant to you. To learn more about how you should respond to the new tax laws, we recommend you consult your tax advisor and your Carter Financial Management wealth manager.  

JoAnne B. Galbraith, CFP®, CPA President

As President of Carter Advisory Services, JoAnne is responsible for the design and integration of each facet of our multi-disciplinary financial plans, while also providing guidance to clients in the pursuit of their financial and life goals.

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