By Heidi Huiskamp, Founder and CEO of Huiskamp Collins Investments, LLC
The Secure Act 2.0, passed by Congress in late December 2022 and signed into law by President Biden, seeks to address the huge gap in retirement savings among both those working and those that have retired. The World Economic Forum forecasts that by 2050, unless savers change behaviors radically, the majority of retirees are on track to outlive their savings by 8–20 years. The implications of that for our seniors, our families, and our country are terrifying. Please read on for the “fixes” the new law puts in place as a reaction to safeguard against such a dark future.
Having to tap a pre-tax employer retirement plan or a Traditional IRA at a government-mandated age before you really need the money is why some savers hate Required Minimum Distributions or RMDs. In 2022, such account holders were forced to take distributions and pay taxes on the entire amount or face a penalty of 50 percent of the amount that should have been taken on top of the draw and tax. The Secure Act raises that age effective 01/01/23 to 73 and then on 01/01/33 again raises that RMD age to 75. That is a boon to savers who would prefer to let their accounts appreciate tax-deferred. Additionally, the new penalty for not taking an RMD has been reduced to 25 percent and, if the account holder takes the distribution and pays the taxes in a “timely manner” (not defined in the Act), the penalty can be further reduced by the IRS to 10 percent.
“Catch-up contributions” are amounts that more senior working savers are allowed to contribute to their employer retirement accounts or IRAs. Beginning in 2023, those workers 50 and over are permitted to invest an additional $7,500 in their employer plan. Beginning in 2025, if you are still working and age 60–63, you are allowed to increase your catch-up amount to $10,000 per year. If instead of an employer plan you contribute to a Traditional IRA, you can look forward in 2024 to having a catch up which will be adjusted every year to inflation in increments of $100 on top of the $1,000 currently allowed.
Some employer plans offer participating employees the option of contributing to a post-tax or Roth plan rather than the traditional pre-tax account. There is real value to this. Savers will pay higher taxes in the year of their contributions, but the growth of that account over time will never be taxed. Before the latest version of the Secure Act, if an employee chose to contribute to the Roth option, his or her match from the company could only be taken as a pre-tax contribution. Beginning this year, workers can choose to instead have those “matches” added to their Roth accounts. The match will be considered taxable income in the year it was contributed, but the tax-free appreciation of the amount is a real gift. Unlike a Roth IRA held at a financial institution, a Roth employer account currently forces an account holder to take RMDs. On 01/01/24, this difference goes away and Roth amounts held in employer plans will no longer be subject to RMDs.
In 2019, employers were allowed for the first time to “auto-enroll” employees in a retirement plan. Beginning in 2025, employers will be required to enroll their employees in their company retirement plan, with a few exceptions. Businesses with 10 or fewer workers or those that have been open less than 3 years will be exempt from this mandate. Also, employees will have the right to “opt out” and not participate.
Also of note is a great change involving 529 Plans, the higher education savings accounts that, after being funded with after-tax dollars, grow tax-free and can be tapped to pay for qualifying educational expenses for a beneficiary. Most often, 529 plans are established when the intended end-user of the account is a child. Sometimes, the entirety of the accounts is not spent because the student received scholarships or the costs of their education was less than the amount accumulated over time. Prior to Secure Act 2.0, the account owner (the adult) could name a new beneficiary subject to rules. Beginning this year, if the account has been open at least 15 years and there is a remaining balance, the adult can roll over the amount into a Roth IRA for the original student based on two limits. The first is that a maximum of $6,500 per year can be thus rolled over and the second is that, in total, no more than $35,000 can be rolled over. What a bequest, though, to be able to provide educational funding along with the potential for long-term tax-free savings for a loved one.
Do you still have questions about retirement savings? I’d be honored to help. Please call 563-949-4705 or email me at firstname.lastname@example.org.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.