SECURE 2.0 is Now Law. How Does That Impact Retirement Planning? Part One

Transcript of Podcast Episode 212

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute.  In todays’ episode, SECURE 2.0 is Now Law. How Does That Impact Retirement Planning?  Part one.

On December 29, 2022, President Joe Biden signed into law the Consolidated Appropriations Act, 2023 (“the Act”) which funds the federal government and a range of domestic and foreign priorities through the end of the fiscal year ending September 30, 2023. The Act also funds continuing assistance for the ongoing war in Ukraine.

For Americans trying to save enough for retirement, the most important section of the Act is the portion often dubbed the SECURE Act 2.0 or more appropriately the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (“SECURE 2.0”).  The original SECURE Act or Setting Every Community Up for Retirement Enhancement Act of 2019 was signed into law by President Donald Trump on December 20, 2019.  The SECURE Act made many changes to the retirement landscape including, raising the age in which to commence required minimum distributions (“RMDs”) from age 70 ½ years to 72 years; eliminating the Stretch IRA concept by requiring inherited IRAs to be distributed to beneficiaries within 10 years from the original account owner’s death with some exceptions; and many other changes to IRAs and employer sponsored retirement plans.

SECURE 2.0 builds upon the original SECURE Act in a few notable ways. There are numerous provisions that impact individual savers as well as businesses that sponsor qualified retirement plans for their workers.  We will summarize just a few of those provisions.

For individuals:

• SECURE 2.0 will increase the age for RMDs again, over time. The RMD age will be 73 for those individuals who attain age 73 in 2023 or later, and age 75 for individuals who attain age 75 in 2033 and later.
• Employees who are age 50 or older currently may make catch-up contributions to their retirement plans such as 401(k) and 403(b) plans and SIMPLE plans to certain inflation-adjusted limits. In 2023 those limits are $7,500 for 401(k) and 403(b) plans, and $3,500 for SIMPLE plans. Starting in 2025, these limits will be increased for employees between the ages of 60 and 63 to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the “regular” catch-up amount in 2024 (2025 for SIMPLE plans).
• In an apparent effort to raise tax revenue, effective for tax years beginning after 2023, catch-up contributions to 401(k), 403(b), and governmental 457(b) plans by employees whose wages exceed $145,000 (as indexed for inflation) must be made on a Roth basis. This Roth treatment of catch-up contributions is mandatory for any plan that makes catch-up contributions available.
• Beginning in 2024, beneficiaries of 529 college savings accounts will be able to make direct trustee-to-trustee rollovers from a 529 account in their name to their Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete. The 529 account must have been open for more than 15 years and the rollover can’t exceed the aggregate amount contributed to the account (and earnings thereon) more than five years before the rollover. Furthermore, aggregate rollovers under the provision cannot exceed $35,000 over the beneficiary’s lifetime. Rollovers are subject to the Roth IRA annual contribution limits, but the limit based on the taxpayer’s adjusted gross income is waived.
• Formerly, failure to take a RMD resulted in a 50% excise tax. In other words, half of the RMD was forfeited, a seemingly draconian measure. That excise tax has now been reduced to 25% or, if the failure to take the RMD is corrected in a timely manner, to 10%. This provision is effective in 2023.
• Previously, Roth IRA owners were not subject to the RMD rules, but Roth accounts in 401(k) and 403(b) plans were. Starting in 2024, those inconsistent rules will be aligned. Roth accounts in employer-sponsored retirement plans will now be exempt from the RMD rules while the participant is alive.
• The current Saver’s Credit that provides lower-income individuals with an incentive to save for retirement each year will be converted to a Saver’s Match beginning in 2027. The Saver’s Match will be a federal matching contribution deposited to a taxpayer’s IRA or retirement plan in an amount up to 50% of their contributions (phased out as the individual’s income increases), capped at a maximum of $2,000 and reduced by certain distributions that are taken by the individual.
• Currently, participants of defined contribution plans and IRAs may have the ability to use up to the lesser of 25% of their account or $145,000 to purchase a qualified longevity annuity contract (“QLAC”) that begins payment at or near the end of the participant’s life expectancy. QLACs are intended to protect against a participant outliving their retirement assets. SECURE 2.0 repeals the 25% limit and increases the dollar amount to $200,000 (indexed for inflation) for newly purchased QLACs.
• Starting in 2026, all retirement plan participants will be able to withdraw up to $2,500 annually from their plan without a premature distribution penalty for the payment of long-term care insurance premiums, whether in a standalone policy or a hybrid life insurance or annuity policy.
• Beginning for tax years after December 31, 2026, first responders can exclude from gross income certain service-related disability pension or annuity payments after they reach retirement age.
• There are various provisions that provide for penalty free distributions made prior to age 59 ½ for cases of domestic abuse, terminal illness, or certain other emergency expenses.

As we previously indicated, this is just a quick summary of a few of the many provisions that impact the retirement planning goals of individuals, as well as the retirement plans sponsored by employers.  There are many other provisions to consider which may impact your unique situation. Contact your Security Mutual Life insurance advisor today to review your goals and objectives for yourself, your family, or for your business.  Your SML insurance advisor will work closely with your tax and legal advisors to create a plan that best fits your goals and objectives.

This concludes part one.  In our next episode, we will examine how Secure 2.0 affects small businesses.

This podcast is brought to you by Security Mutual Life Insurance Company of New York, The Company That Cares®. The content provided is intended for educational and informational purposes only. Information is provided in good faith. However, the Company makes no representation or warranty of any kind regarding the accuracy, reliability, or completeness of the information.

The information presented is designed to provide general information regarding the subject matter covered. It is not to serve as legal, tax or other financial advice related to individual situations, because each individual’s legal, tax and financial situation is different. Specific advice needs to be tailored to your situation. Therefore, please consult with your own attorney, tax professional and/or other advisors regarding your specific situation.

To help reach your goals, you need a skilled professional by your side. Contact your local Security Mutual life insurance advisor today. As part of the planning process, he or she will coordinate with your other advisors as needed to help you achieve your financial goals and objectives. For more information, visit us at SMLNY.com/SMLPodcast. If you’ve enjoyed this podcast, tell your friends about it. And be sure to give us a five-star review. And check us out on LinkedIn, YouTube and Twitter. Thanks for listening, and we’ll talk to you next time.

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