Washington has been at it again...On Sunday we welcomed a new year and with it a number of changes to tax laws. In December of 2019 Congress passed the Secure Act. When this bill became law, it expanded the accessibility of retirement plans for many workers as well as created incentives for workers to save and invest for their future. Since the passage of this bill, it was widely expected that Congress would expand many of these provisions with a Secure Act 2.0 and on December 23, 2022, in over 4000 pages, that’s exactly what happened. Below we will outline some of the changes that this law brings that may be pertinent to our clients. Keep in mind that some of the practicalities have not yet been deciphered (and we will keep you informed as more is available)!
Required Minimum Distributions
Remember a few years ago when age 70 ½ was the magic age for required distributions? A few years ago the age was increased to 72. Secure Act 2.0 has bumped that back to age 73 starting in 2023 and will progressively increase to age 75 over the next decade. This may be a nice relief to those turning 72 this year!
In other welcomed RMD news, the penalty for not taking your Required Minimum Distribution will be halved from 50% to 25%. It can further be reduced to 10% if mistake is remedied in a timely fashion.
Starting in 2025, the Catch-up Contribution limit for savers between ages 60 and 63 will be increased from $7,500 to $10,000. The caveat to this being the catch-up contribution will need to be made in Roth (after tax) dollars if you earned over $145,000 in the previous calendar year.
Those already taking advantage of Roth contributions in their employer’s 401k plan will be happy to learn that their employer’s match can now be made in Roth (after tax) dollars, however it may take some time for 401k record keepers and payroll systems to integrate this change.
In further efforts to increase retirement savings, the Secure Act 2.0 makes automatic enrollment mandatory in 401k plans. This means employees will automatically be enrolled in their plan as soon as they are eligible, deferring at least 3% of their salary. If you do not wish to participate, you are free to opt out. Part time employees will also enjoy looser eligibility requirements allowing them to participate with only 500 hours worked in a year.
To further incentivize the utilization of 529 plans for saving for higher education, the Secure Act 2.0 will allow 529 owners to roll up to $35,000 of unused funds into a Roth IRA for the beneficiary of the plan. This was a greatly needed change as a common concern of 529 owners was the income tax on the growth plus a 10% penalty on unused 529 funds.
Overall, there have been many changes that will directly impact investors in this new law. The good news is the majority of these changes will have a positive impact on retirement outcomes of investors. If you have any questions about any of these new provisions, don’t hesitate to reach out to your advisor.