The Secure 2.0 Act: What to Know
- Reviewed by: Brian Stormont, CFP®
- January 18, 2023
The new SECURE Act could provide more opportunities for retirement savings and income to millions of Americans. The legislation makes it easier for Americans with retirement accounts to save for their future by broadening access to the retirement savings system. The biggest change for most people will be the extension of the age for required minimum distributions and increased “catch-up” limits for people over 60, but with over 90 different retirement changes overall, there is a lot to cover. Here are some of the primary points of the bill:
Required minimum distributions (RMDs)
Under the current rules, Americans must start receiving required minimum distributions from their 401(k) and IRA accounts starting at age 72, OR 70.5 if you turned that age prior to January 1, 2020. With the approval of The SECURE 2.0 ACT of 2022, it will raise the age for RMDs to 73 beginning on Jan. 1, 2023, and then will raise the age further to 75 starting on Jan. 1, 2033. Roth IRAs are not subject to RMDs.
These new rules will also lessen the penalty for failing to take RMDs. The penalty, which was 50% will be reduced to 25% and lowered to 10% if the error is fixed in a timely manner. These reductions will take place directly after the law is passed.
Contribution limits
The bill will boost the “catch-up” limit for those over 50 years old and introduce additional potential “catch-up” contributions for those over 60 years old.
The IRS law currently allows for people 50 years and older to contribute an additional $1000 to their retirement accounts every year over the normal limit. Beginning in 2024, older Americans will be able to contribute an additional amount that is indexed to inflation, rather than a flat $1000.
People between the ages of 60-63 will be able to contribute even more catch-up money in 2025, up to $10,000/year or 50% more (whichever if more) than the standard catch-up contribution. The increased contribution limits would also be indexed with inflation starting in 2025.
Early Withdrawal
Typically, when making withdrawals from a retirement account before the age of 59.5 years old, there is a 10% penalty tax. With the passing of The SECURE 2.0 Act, congress plans to add an exception for emergencies, where account holders that are under 59.5 years old would be able to withdraw up to $1000 per year for an emergency. They would then have 3 years to repay the distribution if they would like. Unless the repayment is made within the three-year period, they will not be able to make any further emergency withdrawals during those three years. Employees will also be able to self-certify the emergency, meaning that they will not have to show any documentation besides personal testimony. The penalty would also be eliminated completely for people who are terminally ill.
The bill will also give some relief to people who have been hit with natural disasters. The new rules will allow for up to $22,000 to be distributed from employer plans or IRAs in the case of a federally declared disaster. These withdrawals would be treated as gross income over three years and would not be penalized. These rules would also apply to anyone affected by natural disasters after January 26, 2021.
Tax credits
The bill will repeal the IRA tax credit (Saver’s Credit) and instead, those who qualify for the Saver’s Credit will receive a federal matching contribution to a retirement account. This will begin with the 2027 tax year.
Congress will also be amending the current IRS law for retirement account rollovers from 529 plans. Beneficiaries of 529 college savings accounts will be allowed to roll over up to $35,000 total in their lifetime from a 529 plan into a Roth IRA. The Roth IRA is still subject to annual contribution limits and the 529 account must have been open for at least 15 years.
If you have questions about how these changes may be able to benefit you, please give us a call!
Reviewed by,
Brian Stormont, CFP®
Brian Stormont is a comprehensive, fee-only financial advisor with Insight Wealth Strategies who began his career in the financial industry in 2000. His expertise encompasses retirement planning, investment planning, estate planning, and high-level strategies to help business owners and individuals minimize their income taxes.
Sources:
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