The Secure Act 2.0: What Business Owners and Retirees Need to Know

June 27, 2024

In this episode of FIN LYT by EWA, Matt Blocki and Ben Ruttenberg explore the intricacies of the Secure Act 2.0. They break down the major changes introduced by this significant legislative update and discuss how it builds upon the foundations set by the original Secure Act of 2019. They focus on key provisions that are especially relevant to business owners, individuals with 529 plans, and those contributing to 401(k)s. The discussion includes an overview of automatic 401(k) enrollments, a new requirement for plans initiated post-2024, and explores the option for employees to opt-out. Matt and Ben also examine the updated rules on Required Minimum Distributions (RMDs), highlighting the shift in age requirements that could affect retirees’ financial planning strategies. Additional topics include the integration of 529 plan funds into Roth IRAs under specific conditions, enhanced catch-up contributions for individuals aged 60-63, and the option for employer match contributions to be directed into Roth accounts. Whether you’re actively contributing to a retirement plan, managing a business, or navigating the complexities of retirement savings, Matt and Ben offer practical advice on how listeners can adapt their financial strategies to align with these updates.

Episode Transcript

Welcome, everyone, to Finlit by EWA. This week I’m joined by Ben Ruttenberg, and we’re going to talk about the Secure Act 2.0. So, Ben, give us a high level on why was the secure act, why is our second version of the Secure act? And look forward to going through the details of how this is going to impact our clients.


Yeah, so the Secure act was a government program that was passed back in 2019. A lot of provisions that helped our clients and really generally improve retirement plans. So raised RMD ages to 72, limited the stretch IRA period to ten years, and just generally encourage employers to improve their 401k plans. So that was passed in 2019, and then in 2022, the 2.0 version of the Secure act was passed. It was part of a nearly $2 trillion spending program that was passed from both houses of the House of Representatives and the Senate, as well as the president. So this is something that is building on the Secure act that was passed. And there are a lot of new provisions that are going to impact our clients. There’s really a ton of new stuff here.


We’re going to kind of focus on probably the eight to ten provisions that are going to be applicable for a lot of our clients. Whether you’re a business owner, whether you have a 529 plan, whether you’re contributing to a 401k, those are things that we’re going to kind of zero in on in this podcast.


Perfect. Well, number one, automatic 401k enrollment. So before it was your choice, if you would, you know, start a new company and enroll in a 401k, now that’s going to be automatic. So, Ben, give us the details on that. And I’m curious, can someone stop this from happening?


Yeah, so this is for. So this is for new 401k plans starting in 2025. If you have. Sorry, can I, can we cut this? Can we start that part over? Yeah, yeah. Just kind of intro me on the number one.


So, Ben, tell us about number one, which is the 401K enrollments. How is that changing in 2025?


Yeah. So starting in 2025, if you are a new 401K plan, you’re going to be required to automatically enroll any new employees starting at 3% pre tax and then that actually increases 1% annually every year all the way until 10%. So it’s a really nice way for new 401K plans to get their employees to start saving and start saving early. This will not apply to existing 401K plans. So if you’ve had your 401k established before December of 2022, you’re exempt from this rule. If you’re a new business that’s been in existence for less than three years, you’re exempt from this rule. And as well as if you’re a small business with no more than ten employees, you’re also exempt. So this is really only applicable for brand new 401K plans.


For sustained businesses that have been in existence for over three years and have more than ten employees. If they start a 401K plan starting in 2025, they are going to be required to automatically enroll their employees. You can opt out of this if you’re an employee, so they can, it’s really, the onus is just on the employer to automatically enroll them and then the employee can choose to then stop, increase, so on and so forth.


Awesome. I think this is a good one. You know, the average, the median net worth in America for someone 65 to 74 is between $400 to $500,000 right now. So usually that’s like the house value at that point. So a lot of people, life just continues to happen, happen, and they always delay, delay saving. So I think this automatic enrollment is good and I think you can stop it. I don’t think most people are going to even know. Most people don’t even look at their paychecks, let alone know they’re in it. So it’ll be a very good thing for this automatic four one k enrollment just because savings is a epidemic right now.


Agreed. And particularly with the 1% annual increase, if you don’t even know it’s happening, you’re not even going to realize it. But like you said, a 1% annual increase, that’s going to make a huge impact on your long term financial independence goals by increasing that by 1%. So generally the, that’s the most saved into vehicle because money is being saved into it before you even realize it’s coming out of your paycheck and then you get your net paycheck and then you start saving and spending from there. So the more money you can get into, the better. And so I really like this provision.


Absolutely. Okay, let’s go to provision number two. So provision number two is going to mostly affect our retired clients and this has to do with required minimum distribution. So this was already changed, but now it’s changing again. So, Ben, what are the specific changes occurring here?


Yeah, so in 2023, the RMD age, or required minimum distribution age increased from 72 to 73, meaning that once you turned 73, you had to start taking distributions from your pre tax accounts, even if you didn’t necessarily want to or need to. So that age went up to 73 in 2023, and then it’s actually going all the way up to 75 starting in 2033. So you’ll have an additional year to delay distributions and then again back in. Starting in 2033, that age will be increased again to 75. So this is a good thing because again, a lot of our clients listening or clients that are subject to RMD’s maybe don’t necessarily need to take them or want to take them. So the longer we can delay having to take an RMD, the more the money can sit and ultimately grow for your goals. Yeah.


And this is long overdue. You know, this wasn’t updated for many years, and longevity has been increasing. How long people are living, people are working longer in some professions that have, would otherwise have huge RMD’s. This is good from a tax perspective. Ultimately, the government’s going to get their money back still. And that’s why in secure act 1.0, let’s say hypothetically now. So starting, like you said, at 73 and then 2033 at 75, let’s say someone goes and they end up with having a couple million dollars. Even after delaying these RMD’s, it goes to their kids. Well, secure Act 1.0, those kids normally would be able to take that before Secure Act 1.0, do a stretch ira and do slow RMD’s over their life and get a lot of tax deferral benefits. Now they have to take that out in ten years.


So, you know, if someone’s passing today, so the government, this isn’t a all good, because that ten year rule in secure Act 1.0 was a huge, you know, revenue driver for the government, because having to take a money out that’s taxable in ten years versus stretching it out over maybe 50 years, obviously, there’s higher tax brackets associated with that, and that’s going to be, you know, a huge boost to what the government gets. So just to speak about that, it’s importance of having a good plan that addresses all your goals and a lot of time. You know, Roth conversions could make sense to avoid some, you know, these RMD’s, living charitable donations, living gifts. There’s a lot of ways. Life insurance contracts. But you don’t have RMD’s that they go tax, ruin your debt.


There’s the countless opportunities for planning around this, these new secure act roles. Sure. Okay, so let’s jump to number three. This is a big one. I think it sounds really good, but it’s like, very few people are going to be able to utilize this in the reality. So, number three is around 529 plans. So, Ben, tell us what’s happening with the 529 plan world.


Yeah, so the Secure Act 2.0 states that if a 529 plan has been established for 1515 years, beneficiaries can roll up to $35,000 from their 529s into their Roth IRAS tax free, penalty free. So this would really only apply if you have a 529 plan that’s been in existence for 15 years that’s over funded to the point that you have money left over that you’re not using for education expenses, and the money is not being rolled into a sibling’s 529 or to a grandchild’s 529. You can roll, let’s say, in 2023, you roll $7,000 from an over funded 529 into a Roth IRA that becomes your Roth IRA contribution for that year.


So you’re able to basically replace your Roth IRA contribution that you would have been making from your overfunded 529 funds, and then you have that $7,000 that you would have funded in the Roth IRA to do. To save into other.


But all 35 could go in there in one year.


Or is it. It just correct?


It uses your. And what if I’m above the income limit to do Roth Ira?


Am I still counting?


Okay, so I could. I don’t have to do a backdoor Roth that year, but that still counts as, like, I couldn’t do a backdoor Roth. Cause I’ve already used this limit.


That’s right. So the 7000 limit still applies. You can’t roll all 35,000 in one year. The 7000 would. Would be your contribution for that year.


Okay. That makes complete sense. Thanks for clarifying that. So we’ve had some questions on that as well. I think the key there is this is for left. Basically, the government saying, if there’s leftover money, if you’ve over funded 529 plans just by that 35, we’re not going to. You could obviously keep the money in there and utilize the 529 plan for your grandchild and have all that tax free growth. But if you want the money back, there’s a little bit of excess. This is kind of freebie they’re handing out. So definitely a no brainer. If you’re funded, already funded, your kids college, maybe post grad, et cetera, there’s still excess money.


And now you’re going to use the money no brainer to get it in the Roth, where there’s no taxes on the growth versus the 529 plan, if you use it for yourself later, you’re paying taxes on the growth plus a 10% penalty on the growth. You still get your basis back tax free. But that’s a no brainer, obviously, if you’ve over funded a 529 plan. So, okay, number four, this is for people. So there’s catch up contributions right now that start at 50. So they’re basically starting a second tier of catch up contributions at 60 to 63. So tell us about the second tier of catch up contributions.


Yeah, this is an interesting one. So this one’s actually starting in January of 2025. So for those that are age 60 to 63, your 401k or 403 b catch up contributions will be the greater of either $10,000 or 50% more than the current catch up contribution. So as of now, the greater choice would be $10,000. So, like you said, right now the current catch up contribution is 7500 for those that are above 50 years old, this particular provision is highlighting those aged 60 to 63 to get an additional 2500. So this would be 10,000 total for their catch up contribution that they can do. Again, that’s starting in January of 2025.


So for those clients that are in that age range, that are still working, that are still making 401k or 403 b contributions will be reaching out to make sure that your contributions are hitting these new limits. And, yeah, just kind of a sniper shot on that age 60 to 63 age bracket.


Awesome, awesome. All right, so that brings us to number five. This is a really interesting one. So, employer matching can now be directed into a Roth. So how does this work, ben?


Yeah, so, traditionally, before the Secure Act 2.0, you contributed to your 401k, whether it’s pre tax or Roth. And then if you were subject to an employer match, that would always go into your pre tax. Four hundred one k. The Secure Act 2.0 now states that employers have the option to potentially direct matching contributions to the Roth 401K. This is now legal for employers to do this. So employers have the option to either contribute their matching contributions into pre tax or contribute to Roth. So just because they have the option doesn’t mean that your employer necessarily is going to be doing this or is going to have the capability to do this, but it is now legal for any employer matching contributions to go into someone’s Roth 401K.


Basically, employer would have to be pretty nice because then they’re, I mean, honestly, because then they’re getting, they’re used to getting a tax deduction on all their contributions. Now they’re giving that up funding post tax money.


Yeah. It’s worth checking in with an HR contact to see if this is something that your employer is offering. But just because it’s now legal to doesn’t necessarily mean that every employer is going to sign up to do.


We’ll do that. Gotcha. So right now, if you put in a Roth 401K, employer is going to put money in as a match, but it’s going to go into pre tax 400k. So when you retire, you’ll get your Roth money tax free, but the pre tax free money from the employer will be taxable later. And now you could get, you could put them Roth, employer could put them roth, but most likely we don’t anticipate a lot of importers would do that. It’s going to cost them a lot more every year, you know, 30% to 40% more every year if they offer that to their employees. I think this would be a good character test of who’s nice and who’s not nice out there in the employer world. Do you think Ewa will do this? Ben, what’s your guess?


It’s a good question. Well, considering Matt is just finding out about this provisioned right this second, we’ll have to see if.


He’S analyze this one. Actually found out about it a long time ago. I was hoping you guys didn’t find out about it and wouldn’t ask me, but. No, I’m just kidding. We’ll discuss, we’ll put it on the team discussion. Okay. So this 6th one I love, because one of the biggest benefits we preach about Roth accounts are there’s no requirement of distributions. So you control if the market’s up, take it. If the market’s down, don’t take it. It avoids what we call the sequence of return risk because you have full control of your money. However it used to be, that was only in a Roth IRA, because a Roth 401K, you’d still need to take those required minimum distributions out. That’s going away. So, Ben, give us the details. When is this happening, et cetera?


Yeah, exactly what you said. Roth 401 ks traditionally have still been subject to RMD’s. This is now changing starting in 2024. So if you have a Rothschild, if you contributed to a 401K plan and there’s a big Roth balance and you just left it there, so you never roll it into an IRA or a Roth IRA, it’s just sitting in its old plan, and you get to the age of 73 and you’re starting to subject to requirement distributions. Prior to 2024, any Roth balance would still be subject to RMD’s. Now, in 2024 onward, your Roth 401K. No Rmd’s. So it’s not going to require you to take money out even if you don’t need to. So this is giving you a little bit more flexibility.


You could hypothetically leave money in your 401k for longer and not have it be subject to RMD’s, whereas the IRA, there’s never been any RMD’s for the Roth IRA.


Awesome. Speaking about Roth is traditionally you’d have two options inside of a Roth IRA, which stands for an individual retirement account inside of a Roth 401K, which is or 403 B. Now this is getting added onto two other type of retirement plans. So, Ben, what’s happening with this?


Yeah, so the secure Act 2.0 now states that contributions to a simple IRA and a SeP IRA can be done in a Roth fashion. Before 2023, any simple or SeP IRA contributions had to be of a pre tax variety. So starting in 2023, they have now allowed Roth contributions to be made legal for SeP iras and simple iras. It’s taking some providers a little bit longer to adhere to this rule or maybe support this rule. So I’ve done some research. Certain custodians have been really on the ball with this and are allowing Roth simple and SeP IRA contributions. Some custodians have not yet adjusted to this yet, so it’s worth monitoring. If you are funding a simple IRA or SEP IRA, see if your custodian, excuse me, permits for Roth contributions for that.


Awesome. So, final one we have listed for now and again, Ben, you mentioned at the beginning of this podcast there’s many changes in the Secure Act 2.0. We picked out the ones that we think will mostly impact our clients.


Yeah, this podcast would be like 3 hours if we dug through every detail. Yeah.


So there’s a lot of stuff here that would just not affect, you know, someone just doing regular financial planning. So the 8th one is around school loans, which I think this is great. So Ben, tell us about what employers can do with school loans.


Yeah, we’re actually filming this in February of 2024. So this provision just started in December of 2023. So excited to see this one roll out. Employers are now permitted to make matching contributions in a simple plan with respect to qualified student loan payments. So you can essentially have your employer matching contributions be directed towards your student loan payments. This is solely for student loans related to qualified higher education expenses, so as long as they are considered qualified and for a higher education, you can have any employer matching contribution. Instead of being directed to your 401k, it can be directed directly to your student loans.


Awesome. Well, Ben, thanks for giving us the high level on the Secure Act 2.0. Obviously these are some changes are in effect today as we record this. As you mentioned, some changes are happening in the coming years. So any questions on this, please reach out and we’re happy to help navigate your financial plan and make sure that you’re being as efficient as possible with these legislative changes that have occurred. Thanks for joining us. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.

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