Key Provisions of the SECURE Act 2.0

Posted 1/31/23

FINANCIAL Advisor The SECURE Act 2.0 was passed into law late December 2022. SECURE is an acronym for “Setting Every Community Up for Retirement Enhancement”. The original SECURE Act was passed …

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Key Provisions of the SECURE Act 2.0

Posted

FINANCIAL Advisor

The SECURE Act 2.0 was passed into law late December 2022. SECURE is an acronym for “Setting Every Community Up for Retirement Enhancement”. The original SECURE Act was passed into law in late 2019 with an aim to reform retirement related rules. As an extension of the original SECURE Act, the SECURE Act 2.0 was passed into law with the goal to further build upon some of the original retirement plan related rules.

Following are some of the highlights and key provisions of the SECURE ACT 2.0:

• Required Minimum Distributions (RMDs) are minimum amounts that must be withdrawn from pre-tax retirement accounts once the account owner attains a certain age. The SECURE Act 2.0 increases the RMD age to 73 beginning January 1st 2023. Additionally, the RMD age is further pushed to age 75 in 2033. The SECURE Act 2.0 also eliminated RMDs for ROTH 401(k) and 403(b) accounts (starting in 2024) making this rule in-line with ROTH IRAs.

• Prior to the SECURE Act 2.0, there was a 50% penalty for missed RMD distributions. Under the new rule the penalty for missed RMD distributions is reduced to 25% and in certain cases further reduces the penalty to 10%.

• The new law also mandates that employers require automatic enrollment of employees in a 401(k). Current 401k plans are not required to adopt these new automatic enrollment rules. Also exempt from this rule is an employer with ten or fewer employees. This provision is effective in 2025.

• Most employer sponsored retirement plans offer pre-tax contribution allowances and after-tax (ROTH) allowances. The exception was SEP and SIMPLE IRA plans which previously only allowed for pre-tax contributions. SECURE Act 2.0 now allows for both SEP and SIMPLE IRAs to allow for after-tax ROTH contributions. This provision is effective in 2023.

• In certain situations, and within certain limits, 529 education account balances can be rolled into the 529 beneficiaries ROTH IRA. This provision is aimed at supporting savers who have been making contributions to a 529 plan in lieu of saving for their own retirement.

• Larger “Catch-Up” allowance are a result of SECURE Act 2.0. Effective in 2024 for IRA or ROTH IRA contributions, catch-up contribution amounts for those age 50 or better will be indexed for inflation.

• Employer sponsored retirement plans will allow for higher catch-up contribution allowances as well. These “catch-up” contributions must be designed in a ROTH (after-tax) account for those individuals with wages in excess of $145k per year. This rule requiring higher income earners to put “catch-up” contributions into ROTH are only valid for 401(k), 403(b) and 457(b) plans while ROTH IRA catch-up contributions are unimpacted by the forced ROTH “catch-up” contribution designation.

This article highlights only a portion of the many changes the SECURE Act 2.0 has on the retirement landscape. While components of SECURE Act 2.0 have been brewing for quite some time, the haste at which the final version of the legislation was passed into law leaves some questions and nuances unanswered and likely open to future clarification by the IRS and/or legislators. Financial professionals and retirement plan custodians will be working diligently to review, digest, and work with clients to navigate these changes.

Adam Smit is CERTIFIED FINANCIAL PLANNER™ with Adam Smit Investment Management LLC and a registered principal of LPL Financial. This article is for general information only and not intended to provide specific advice or recommendations for any individual. Adam Smit Investment management LLC and LPL Financial do not provide tax or legal advice. Securities offered through LPL Financial. Member FINRA/SIPC.

BY ADAM SMIT