December 28, 2022

How The Secure Act 2.0 Could Impact Your Financial Plan

In 2019, the Secure Act was signed into law– signaling positive changes to the United States retirement system for both employers and employees. As we enter 2023, we could be seeing more positive changes soon on the horizon.


The Secure Act 2.0, part of a $1.7 trillion spending package was passed in both the House of Representatives and the Senate and will soon be making its way to the President’s desk, with the expectation that it will be signed into law. The Secure Act 2.0 builds on its predecessor, which originally raised the age of required minimum distributions (RMDs) to 72, limited Stretch IRAs to 10 years, and generally encouraged employers to improve their 401(k) plans.

Here are just a few key highlights of the Secure Act 2.0 as it works through the legislative process that we think will have a positive impact to our clients:


1.)   Requiring automatic 401(k) enrollment

Under new provisions, employers would be required to automatically enroll new employees in their 401(k) or 403(b) plan. The automatic enrollment, for eligible employees, will start at a 3% pre-tax contribution rate of the employee’s paycheck and tick up by 1% annually until it reaches 10%. This provision begins in 2025. These proposed provisions would apply to new 401(k) and 403(b) plans established after the legislation’s enactment date. Existing 401(k) plans, new businesses in existence for less that three years, and small businesses with no more than ten employees would be exempt.


2.)   Increasing the age for required minimum distributions (RMDs)

The Secure Act 2.0 states that RMDs would increase from age 72 to age 73 in 2023, and then again to age 75 in 2033. Individuals will have an additional year to delay taking a forced distribution from their retirement accounts that require RMDs (Traditional IRA, SEP IRA, etc.). If you turned 72 in the calendar year of 2022, you’ll still be required to take your RMD by April 1, 2023. But if you turn 72 in the calendar year of 2023, you won’t be required to take an RMD until the following year (when you turn 73).

Additionally, the penalty for failing to take an RMD in a required year is being proposed to be reduced to 25% from its original 50%. Furthermore, if a missed RMD is corrected in a timely manner, the penalty would be limited to just 10%


3.)   529 Plan to Roth IRA rollovers now allowed, but limited

Once a 529 plan has been established for 15 years, beneficiaries can roll up to $35,000 from their 529s into their Roth IRAs, tax and penalty free. This rollover would be a replacement to their annual contribution, not an addition. Previously, any “growth portion” of funds in a 529 plan that were not pulled out for qualified education expenses were subject to ordinary income tax and a 10% penalty. This provision allows for more flexibility for any overfunded 529 plans to avoid those taxes and penalties.


4.)   Higher Catch-Up Contributions in Early 60s

For those aged 60-63 years old, 401(k) catch up contributions will be the greater of $10,000 or 50% more than the current catch-up contribution. As of now– the greater choice is $10,000 (but this is subject to change as catch-ups are indexed for inflation). Previously, the catch-up contribution was $6,500 for those over age 50.


5.)   Employer Matching Contributions Can Be Directed to Roth

Previously, if an employer offered an employer match for a 401k, it needed to be distributed to a pre-tax account. This provision allows employers to offer Roth matching contributions moving forward.


6.)   No More Roth 401(k) RMDs

Previously, a Roth 401k plan was subject to RMDs. To avoid this, a Roth 401k can be rolled into a Roth IRA to avoid RMDs. Starting in 2024, however, a Roth 401k will no longer be subject to RMDs– so account holders will have the choice to keep funds in their Roth 401k, or to roll into a Roth IRA (without any difference in RMD rules).


7.)   Roth Contributions for SIMPLE and SEP IRAs

Previously, all contributions to SIMPLE and SEP IRAs must have been made on a pre-tax basis. Starting in 2023, one can now make Roth contributions to these retirement accounts.


As the Secure Act 2.0 progresses through the legislative process, be sure to consult with a tax and financial advisor to discuss how these changes impact your financial plan.


Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.

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This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. The tax and estate planning information provided is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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