In late December 2022, the SECURE Act 2.0 was passed as a part of a $1.7 trillion omnibus spending package. The Act has a litany of provisions impacting Americans – too many to cover in depth in one blog post. That is why we are breaking down the Act’s impact into four parts – what it means for business owners, employees, retirees, and parents.
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What exactly IS this?
Let’s face it – retirees in America are hurting. Savings rates aren’t what they should be, and older Americans are paying the price. The recent rise in inflation has only exacerbated things.
Lawmakers created the SECURE Act (version one) back in 2019 to facilitate the accumulation of capital in American’s retirement vehicles such as IRAs and 401(k)s. But it wasn’t enough – the savings shortfall persisted and Congress came up with another set of provisions to support capital accumulation. This time there was special emphasis on encouraging lower income earners to participate in their employers’ 401(k) plans.
Let’s break out what the impact may be for particular groups of people.
SECURE Act 2.0 impact on business owners
The passage of the SECURE Act 2.0 has benefits for business owners who are tasked with the formidable challenge of saving for retirement on their own. The law permits self-employed people to establish SEP and SIMPLE IRAs in Roth form.
To briefly review the difference between Roth and Traditional IRAs:
- A Roth IRA is funded with after-tax dollars. The funds accumulate in the IRA, and the owner does not pay tax upon distribution.
- A Traditional IRA is funded with pre-tax dollars. The funds accumulate in the IRA, and the owner pays tax upon distribution.
Allowing business owners to save money after-tax is a potentially huge advantage for someone who anticipates being in a higher tax bracket when they retire and/or are forced to take distributions from their IRA account.
What it means for employees
Now that the SECURE Act 2.0 has passed, there are significantly better conditions for workers who are looking to their employer sponsored retirement vehicles to help them accumulate savings.
- Employers may match the contributions – up to 3% – that an employee makes into a Roth 401(k) plan. Prior to the SECURE Act 2.0’s passage, this was not the case.
- 401(k) plans will auto-enroll employees. They will be notified and given the chance to opt out, but a certain percentage of their pay will be automatically directed into their 401(k) account.
- The Act allows for the creation of an Emergency Savings Account with an employee’s 401(k) plan. This may be drawn on without penalty for up to $1,000. This is beneficial because it allows the employee to save and reap the benefits of having their funds be matched, while also allowing them the flexibility to utilize that capital in a pinch without being penalized for it.
SECURE Act 2.0 and retirees
There is a plethora of beneficial provisions within the Act for retirement age Americans.
- The age at which someone is required to take distributions from their retirement account (IRA, 401k, etc.) rises from 72 to 73 in 2023. In 2033, it will be age 75. This is beneficial to those who already have enough savings to fund their daily living expenses, and can allow their capital to accumulate for a longer period of time.
- The penalty for missing a distribution payment from an IRA is reduced from 50% to 25%. This is a far less onerous burden for a retiree to take on.
- If someone dies and leaves a retirement account to their spouse, the RMD schedule can go according to when the deceased spouse would have had to take them. Prior to this, the surviving spouse had to take them in accordance with their own RMD schedule or they could stretch them over their expected lifetime.
- For those age 50 or older, you can make an additional $1,000 contribution to your IRA. This is called a “catch up” contribution. Starting in 2024, these amounts will be indexed to inflation
And lastly, good old mom and dad
Let’s say you save diligently for your kid’s college education, only to find out that – surprise – you over saved!
A rare and pleasant problem to have, but what happens to the money – do you have to let it sit there forever?
The good news is that now that the SECURE Act 2.0 is passed, you can roll $35,000 over the beneficiary’s lifetime from that 529 plan into a Roth IRA without paying taxes or penalties.
There are a few caveats, though:
- The beneficiary of the 529 plan must be the same as that of the Roth account
- The 529 account has to have existed for at least 15 years prior to rolling over the money
- Rollover must occur in 2024 or later
- The rollover must follow the Roth IRA annual contribution limits (which is $6,500 in 2023)
- Contributions and the earnings on those contributions that were made within the last 5 years cannot be transferred
Are you excited yet?
We hope you’ve enjoyed our blog on what the passage of the SECURE Act 2.0 means for business owners, retirees, and parents. Did we inspire you to pursue your retirement savings goals with more zest?
We are financial advisors in Morristown, NJ serving the local community and beyond. If you have questions about retiring in New Jersey, retiring in general, or (like us) are just plain old Bruce Springsteen fans, reach out and send us a message.
United States Senate Committee on Finance. SECURE 2.0 Act of 2022. https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
IRS.gov. Roth IRAs. https://www.irs.gov/retirement-plans/roth-iras