Littlejohn: What you should know about the SECURE Act 2.0 |

Littlejohn: What you should know about the SECURE Act 2.0

Brian Littlejohn
It's Your Money
The Aspen Times

In the final days of 2022, Congress passed a new set of retirement rules designed to accelerate contributions to retirement plans and improve access to funds earmarked for retirement.

The law is called SECURE 2.0, and it is a follow-up to the original Setting Every Community Up for Retirement Enhancement (SECURE) Act passed back in 2019.

The sweeping legislation contains dozens of significant provisions. Here are the provisions that are most likely to affect you and members of your family:

New Distribution Rules

The required minimum distribution (RMD) age has risen to 73. By far, one of the most significant changes was increasing the age at which owners of retirement accounts, like Traditional IRAs, must begin taking RMDs. Further, starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. However, if you are turning 72 this year and have already scheduled your withdrawal, you may want to consider revisiting your approach.

Access to funds: Plan participants can use retirement funds in an emergency without fees or penalty. For example, beginning in 2024, an employee can take up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.

Reduced penalty: Starting this year, if you miss an RMD for some reason, the penalty drops to 25% from 50%. If you promptly fix the mistake, the penalty may drop further to 10%.

New Accumulation Rules

Catch-up contributions: On Jan. 1, 2025, investors aged 60 through 63 years old can make annual catch-up contributions of up to $10,000 to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, it’s important to note that the law applies certain restrictions to individuals who earn more than $145,000 annually.

Automatic enrollment: In 2025, the act requires employers to automatically enroll employees into workplace retirement plans. However, employees can choose to opt out.

Student loan matching: Beginning in 2024, employers can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.

New Roth Rules

529 to a Roth: Starting in 2024 (and pending certain conditions), individuals will be able to roll a 529 education savings plan into a Roth IRA. Therefore, if your child receives a scholarship, goes to a less expensive school, or does not end up going to school at all, the money can eventually be used for retirement. However, these types of rollovers will be subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding period requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are also allowed under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

SIMPLE and SEP: Beginning this year, employers can make Roth contributions to savings incentive match plans for employees (SIMPLE) or simplified employee pensions (SEPs).

Roth 401(k)s and Roth 403(b)s: The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth IRA rules. In 2024, the legislation will also eliminate RMDs from Roth accounts held within employer retirement plans.

Additional Highlights

Support for small businesses: This year, the new law will increase the tax credit designed to assist with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers to small businesses offering a workplace plan.

Qualified charitable donations (QCDs): A QCD is a direct donation from an IRA to a qualified charity made by someone who is at least 70½ years old. This year, the QCD limit is $100,000 per person. Beginning in 2024, the limit will receive annual adjustments for inflation.

A Word of Caution

The aforementioned rule changes may or may not mean that adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changes to another.

If you believe that changes to your particular strategy are appropriate, be sure to reach out to your trusted financial professional(s) for real-time advice. The regulations can change with little to no notice, and there is no guarantee that the rules will remain the same over time.

Brian Littlejohn, MBA, CFP, CFA is the founder of Sherwood Wealth Management, an independent registered investment advisor firm that specializes in inherited wealth. He lives in Woody Creek and works with clients in the Roaring Fork Valley and beyond.