The views expressed are those of Anchor Capital Advisors, LLC (“Anchor”) and are subject to change at any time. They are based on our proprietary research and general knowledge of said topic. The below content and applicable data are in support of our views on said topic. Please see additional disclosures at the end of this publication.
Prior to the turn of the year, Congress passed the Consolidated Appropriations Act of 2023, a $1.7 trillion omnibus spending bill that included everything from defense funding to social program & infrastructure support. The package also included the SECURE Act 2.0, a bipartisan sequel to the 2019 bill that bolstered retirement savings plans for Americans.
The SECURE Act 2.0[1] included widespread enhancements to savings plans for both retired andworking Americans. The below non-comprehensive list highlights a number of these changes.
GENERAL ENHANCEMENTS
- Increased Beginning Age for Required Minimum Distributions. Effective 2023, the beginning age for Required Minimum Distributions (“RMDs”) increased from 72 to 73. Subsequently for those who will turn 74 years of age in 2033 or later, the applicable RMD age will be 75. Those who were already subject to RMDs must continue taking their distributions each year.
- Changes to Catch-Up Contributions. Effective 2025, individuals who are 60 through 63 years of age will have their catch-up contribution limit increased to the greater of $10K or 150% of the catch-up amount in that year, indexed for inflation. For those with SIMPLE plans, this limit will increase to the greater of $5K or 150% of the catch-up amount in 2025, indexed for inflation. One caveat for individuals earning more than $145K: all catch-up contributions for those 50 or older will be required to be made as after-tax contributions to Roth accounts. Additionally, the $1K catch-up IRA contribution for individuals over 50 will now be indexed for inflation starting in 2024.
- Saver’s Match. As an incentive for low- and moderate-income individuals to contribute to retirement plans, the SECURE Act 2.0 created the “saver’s match”, a federal matching program. Effective 2027, individuals will receive a match equal to 50% of their contributions, up to $2K, directly into their IRA or retirement plan. The saver’s match is subject to income phaseouts starting at $41,000.
- Improved Coverage for Part-Time Workers. The SECURE Act required employers to allow part-time employees to make elective contributions to 401(k) Plans if they met certain service requirements. Initially, those service requirements were three consecutive years where the part-time employee had at least 500 hours of service. This requirement would become effective in 2024. As part of the SECURE Act 2.0, the service requirement is reduced to two consecutive years, effective 2025.
- Student Loan Matching. Effective 2024, employers would be allowed to match their employees’ student loan payments with contributions into qualifying plans such as 401(K) Plans, 403(b) Plans, 457(b) Plans, and SIMPLE IRAs.
- Lost-And-Found Database For Retirement Savings. The SECURE Act 2.0 tasked the Department of Labor with creating an online “lost-and-found” database for retirement savings plans. Individuals would be able to easily search for plans of which they are a participant or beneficiary to find the administrator’s contact information. According to the bill, the database must be established within two years.
ADDITIONAL PENALTY-FREE EARLY WITHDRAWALS
To alleviate financial hardship for Americans, the SECURE Act 2.0 added several new circumstances where early withdrawals of qualified assets would be exempt from the 10% penalty tax. The below includes some examples of those new circumstances.
- Emergency Withdrawals. Effective 2024, individuals will be allowed to make a $1K penalty-free distribution every year for unforeseeable expenses caused by personal emergencies. Individuals would then have the option to repay the distribution within a 3-year period, however no subsequent emergency withdrawals can be made during the repayment window.
- Withdrawals for Domestic Abuse Victims. Effective 2024, victims of domestic abuse would be allowed to withdraw up to $10K of their qualified retirement plans without incurring any penalties. This limit is indexed for inflation for subsequent years. Individuals would be able to self-certify that they qualify for this exception, noting the bill defines domestic abuse to include physical, psychological, emotional, sexual, or economic abuse by a partner.
- Withdrawals for Individuals with Terminal Illness. Effective 2024, individuals with a terminal illness will be able to take distributions from their qualified plans without incurring the 10% penalty tax. Such withdrawals would have to be accompanied with a physician’s certification to qualify the exception.
- Withdrawals for Long-Term-Care Insurance. In order to combat the rapidly rising costs of long-term-care, the SECURE Act 2.0 allows for retirement plans to make qualified distributions for the purposes of purchasing long-term care insurance. Such distributions are limited to $2,500 per year.
- Withdrawals Related to Qualified Disasters. In certain circumstances, individuals affected by natural disasters are allowed to take a penalty-free withdrawal of up to $22K from their retirement plans. To qualify, individuals must have their principal place of abode within the disaster area and must have sustained an economic loss caused by the disaster. Additionally, eligibility is contingent on various designations by the Federal Emergency Management Agency (“FEMA”). While this change will not go into effect until 2024, those affected by FEMA-designated disasters are also afforded other avenues of relief through the Tax Code.
CHANGES TO RELATED ROTH ASSETS
- 529 Plan to Roth IRA Rollovers. 529 Plans, which are tax-advantaged accounts funded for education expenses, will now be allowed to make penalty-free rollovers to Roth IRAs with the same beneficiary, with certain limitations. Rollover amounts are subject to annual contribution limits, and lifetime aggregate rollovers cannot exceed $35K. Additionally, the 529 Plan must have been in existence for at least 15 years, and amounts contributed or earned within a 5-year
period are ineligible for the rollover. This strategy, which goes into effect in 2024, will be especially beneficial for those worried about over-funding 529 Plans for beneficiaries. - Roth 401(k) Plans Exempt from RMDs. Prior to the SECURE Act 2.0, Roth IRA accounts were exempt from RMDs but those who kept Roth assets within a 401(k) Plan were still subject to the mandatory distributions. Effective 2024, Roth 401(k) Plans will now also be exempt from RMDs. For those who ultimately decide to keep their Roth assets in employer plans, it’s important to remember matching employer contributions may be pre-tax and still subject to RMDs.
- SIMPLE and SEP Roth IRAs. Employees contributing to SIMPLE IRAs or SEP IRAs will now be allowed to make after tax contributions into Roth versions of said plans.
- Elective Roth Treatment of Matching Contributions. Employees participating in qualified retirement plans will now be able to elect to receive their matching and non-elective contributions as Roth contributions. The amounts would be immediately vested as they would be included in the employee’s gross income. This change applies to all 401(k) Plans, 403(b) Plans, and 457(b) Plans.
OTHER TAX PROVISIONS
- Reduced RMD Penalty. The penalty for failing to withdraw RMD amounts was reduced from 50% to 25%. Additionally, if the individual corrects the error “in a timely manner”, the excise tax is reduced further to 10%.
- Enhancements to Qualified Charitable Distributions. Qualified Charitable Distributions (“QCDs”), or charitable gifts made directly from an IRA, were initially limited to public charities and capped at a static $100K per year. The SECURE Act 2.0 enhanced QCDs to allow for a one-time gift up to $50K to charitable structures such as a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. Additionally, the aforementioned $100K limit for QCDs will also now be indexed for inflation.
To learn more about QCDs and the strategy’s benefits, click here.
HOW ANCHOR CAN HELP
The changes to retirement savings plans offer new opportunities and increased flexibility for both working & retired Americans. Determining the best approach requires a comprehensive review of your financial situation and future goals. Contact your Private Client Advisor to help design the best retirement strategy for you.