After much political wrangling, the long-awaited Secure Act 2.0 passed Congress and was signed by President Biden on December 23rd. The Act includes many meaningful improvements and changes for retirement savers and employer-sponsored retirement plans. We’ll highlight seven noteworthy items here:
1. Required Minimum Distribution (RMD) age is increasing – RMDs are government-mandated minimum amounts you must take out of your IRA account when you reach a certain age. Before the Secure Act of 2019, RMDs were required to begin in the year you turned 70.5 years old. SA 2019 increased this age to 72. Secure Act 2.0 is increasing it again, first to age 73 beginning in 2023, before jumping to age 75 in 2033. If you have begun taking RMDs already, you must continue to do so. If you celebrate your 72nd birthday in 2023 you no longer will need to take your first RMD until 2024.
2. Penalty for missing RMDs is reduced – The current penalty for missing a RMD is 50% of the RMD amount not taken. For example, if your RMD for 2022 is $20,000 and you only take $10,000 before 12/31/22, you would be assessed a penalty of $5,000 and still be required to take the remaining $10k of your original RMD amount. Under Secure Act 2.0, the penalty amount is reduced to 25%, and if corrected in a timely manner, the penalty amount is 10%.
3. Catch-up contribution limits are increasing – Retirement savers age 50+ have long been able to contribute more than those under age 50 through what’s known as a catch-up contribution. For example, a 401(k) investor over the age of 50 is eligible to contribute an extra $6,500 for 2022. Beginning in 2025, 401(k) participants aged 60 to 63 will have their catch-up contribution limit increased to $10,000. 401(k) catch-up amounts will be indexed to inflation beginning in 2026. For IRA investors aged 50+, the $1,000 catch-up contribution limit will be indexed to inflation beginning in 2024.
4. 529 to Roth rollover – 529 account owners will be allowed tax and penalty free rollovers to a Roth IRA with certain limitations, including:
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- a. the 529 account must have been opened for 15 years
- b. you can’t transfer contributions and earnings attributable made in the last five years
- c. the lifetime rollover limit is $35,000
- d. the rollover in any one year can’t exceed the annual Roth contribution limit for that year
- e. the 529 and Roth IRA must be in the same name (of the 529 beneficiary).
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5. QCD limit increasing – Qualified Charitable Distributions will be indexed by inflation beginning in 2023. The current limit is $100,000 per year for people who have reached the age of 70.5 years. The Act also permits a one-time gift from your IRA to a charitable trust or gift annuity of $50,000.
6. Automatic enrollment in 401k plans is now a requirement – Employers offering a new 401(k) or 403(b) are now required to auto-enroll participants with an employee contribution level of 3% of income, which increases by 1% per year to at least 10% of income, but not to exceed 15%. There is an opt-out provision for the employee, but the default has changed from opting in to being automatically enrolled.
7. Emergency access to 401k savings – Distributions from an IRA have long been subject to a 10% penalty if taken before 59.5, with some exceptions. Those exceptions are increasing under 2.0. Retirement savers with a 401(k) will be allowed to take an emergency distribution of up to $1,000 during the year without paying the 10% penalty that applies to early distributions.
Secure Act 2.0 includes many other retirement and employer-related provisions. Below, we have included a few articles that discuss the seven provisions we highlighted above, and more. More details and clarifications will come out in future weeks and months. If you’d like to better understand the implications of Secure Act 2.0 on your financial life, please reach out to your Lead Advisor.
Sources and further reading:
https://www.thinkadvisor.com/2022/12/20/10-secure-2-0-act-measures-included-in-1-7b-spending-bill/
https://www.irahelp.com/slottreport/congress-considers-spending-bill-includes-secure-20
https://www.kiplinger.com/retirement/bipartisan-retirement-savings-package-in-massive-budget-bill
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