Navigating The Secure Act 2.0
Setting Every Community Up for Retirement Enhancement (Secure)
On December 23rd, 2022, a massive $1.7 trillion dollar spending bill was signed into law. Attached to this bill was the Secure Act 2.0, which is essentially a sequel to the Secure Act that was passed at the end of 2019. Much like its older counterpart, the Secure Act 2.0 brings sweeping changes to retirement planning, both for those who are currently saving for their retirement, as well as those who are already living out their golden years. Here are some major provisions that may affect you and your retirement. We understand that anytime the government makes big changes like this, that it can be confusing. If you have any questions or concerns, please reach out to us, as it’s what we’re here for.
RMD Age Change
The Secure Act 2.0 shifts the RMD (Required Minimum Distribution) age up to 73, from 72. The new RMD age of 73 goes into effect for this year, 2023. In the year someone turns 73, they must begin to take RMDs from their retirement accounts. Upon reaching the requisite age (now age 73 instead of 72), individuals will still be able to delay their first RMD until April 1st of the year following the year, they turn 73. Thus, an individual turning 73 on any day in 2023, can take their first RMD until as late as April 1st, 2024. However, if the first RMD is not taken in the year someone turns 73, but is instead taken the following year (by April 1st), a second RMD will also still need to be distributed that year (for the year the individual turns 74). Either way, the first age-73 RMD will always be calculated using the age 73 life expectancy factor, which can be found in the uniform lifetime table, that the IRS provides.
529 Plan Roth Conversion
Starting in 2024, once a 529 plan has been opened for at least 15 years, the beneficiary could roll up to $35,000 from their 529 into a Roth IRA. This would not be in addition to their contribution limit per year. Assuming the Roth IRA contribution limit remains the same for 2024, a 529 beneficiary could roll up $6,500 ($7,500 if their age 50 or older) of their 529 into a Roth IRA per year. It would take them 6 years to move the full $35,000 that their allowed to roll over from their 529 to a Roth IRA. This benefits those who over saved for college, as they can use their left over 529 money to save for retirement in a Roth IRA.
Auto Enrollment for New 401(k) & 403(b) Plans
Beginning in 2025, any new 401(k) and 403(b) plans must automatically enroll new participants to contribute at least 3% of their pay to the plan. The 3% contribution is just a starting point, and it will automatically increase by 1% each year, until the employee gets to contributing 10%. Participants will still be allowed to opt out of this if they want, and all existing 401(k)s & 403(b)s will be grandfathered and exempt from this new rule.
New Catch-up Contribution
There will be a brand-new catch-up contribution starting in 2025. For those of you who are 60 to 63 years old, 401(k) catch-up contributions will not just be the $6,500 that those 50+ can make. It will be the greater of $10,000 or 50% more than the current catch-up contribution. If this new rule was in place for 2023, (it will start in 2025) it would have been $11,250 ($7,500 (2023 Catch-up contribution) * 150%) and not $10,000.
Employer Match Can be Roth Too
Starting this year in 2023, if an employer offers a Roth option with their retirement plan that has a match, the match can now go directly into the Roth account. In years past, the employer match always had to go into a pre-tax traditional retirement account, and was not allowed to go into the Roth account. If the employee wants their match to go into their Roth account, the employee will have to include the match as income for the year on their tax return, and thus pay taxes on it in the year the match gets deposited into their Roth account.
Here is an example of how this would look; An employee with a $100,000 salary, contributes 3% into their Roth 401(K), which is just enough to get their full employer match of 3%. So, the employee is contributing $3,000 per year (3% of $100,000) and is getting an employer match of $3,000, which is all going directly into the Roth 401(K). Instead of their W-2 having just having the $100,000 listed as their salary, it will also show an additional $3,000 of income, that represents the employer match into their Roth 401(K), and is taxable to the employee for the year its contributed to the account.
Employer Matching Student Loan Payments into 401(k)s
Starting in 2024, employers will have the option of matching their employee’s student loan payments, in the form of an employer contribution into their work sponsored plan. If the employee makes a student loan payment, the employer will have the option of matching their payment into their retirement plan. However, it is up to the employer as to whether they want to allow this, meaning it’s not a requirement.
Cuts the RMD Penalty in Half
The 50% penalty for failing to take an RMD goes down to 25%, starting in 2023. It further gets reduced to “only” 10% if the RMD is missed but then corrected in a timely manner. As of now it is unclear as to what exactly is a timely manner.
Retirement Accounts can be Used as Emergency Funds
In 2024, employees participating in an employer sponsored retirement plan will be allowed to withdraw up to $1,000 from their account to pay for emergency expenses, without having to pay the 10% early withdrawal penalty if they are under 59 and ½. They would still have to pay ordinary income taxes on the money they withdraw, just not the 10% penalty.
Employer-Linked Emergency Funds
Beginning in 2024, employers can automatically opt employees into an optional payroll funded emergency fund with up to 3% of their compensation. The first $2,500 put into this account by the employee sits there as an emergency fund. Once the account hits $2,500, additional contributions go into the employee’s Roth 401(k). Employers can match the contributions 1:1 up to $2,500. The first four withdrawals from the account each year are penalty-free. At separation, the money can be taken as cash (penalty-free), rolled into a Roth IRA, or moved into the Roth 401(k). At Sgroi Financial, we recommend an emergency fund of at least 3 to 6 months of expenses, and $2,500 will almost certainly not be an adequate emergency fund for most people.
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Sgroi Financial is a full service, independent financial planning firm proudly serving the Western New York area since 1971. We offer services that will help you achieve your financial goals including retirement planning, investment management, estate planning, college planning and insurance. We help individuals, families, retirees, working adults, young adults and business owners.