On December 29, 2022, SECURE Act 2.0 was passed into law. The SECURE Act 2.0 has many more provisions than the original SECURE Act, portions of which do not take effect until next year or later. Some of the provisions still need clarification from the IRS and some will need to be implemented by company retirement plans and/or custodians before they can be utilized.
Let’s first review the two major provisions that came from the original SECURE Act, which was passed into law in December of 2019.
The starting age requirement to take distributions from retirement accounts increased to 73 (from age 72). For those born in 1960 or later, the age to begin required distributions is 75.
The age to begin making QCDs (qualified charitable distributions) remains at 70 ½. The $100,000 per year limit will be indexed for inflation beginning in 2024.
There are more options for making Roth contributions in employer-sponsored retirement accounts.
SEP-IRAs and SIMPLE IRAs can now be a Roth version of those accounts. As mentioned in the introduction, the custodians have to create the necessary forms to allow the accounts to be opened and funded, but they are now allowed.
For those individuals that have excess funds in a 529 Plan, starting in 2024, there will be the opportunity to use funds from the 529 Plan to fund a Roth IRA for the named beneficiary.
The account has to have existed for at least 15 years and you cannot use contributions made within the past 5 years (or earnings on those last 5 years of contributions), but otherwise, those funds can be used to fund a Roth IRA.
The ability to contribute to a Roth IRA is the same regardless of where the funds come from and you can use up to $35,000 (lifetime limit; indexed for inflation) from a 529 Plan to fund a Roth IRA.
Beginning in 2025, in the year you turn ages 60, 61, 62, or 63, you may make a larger catch-up contribution.
A surviving spouse can treat the inherited retirement account as if the decedent is still the owner. This could help delay distributions from the account.
Generally, you cannot take a distribution from a retirement account before age 59.5 without incurring a 10% penalty. Below are some new/updated provisions to allow early distributions without penalty under certain circumstances:
Below is a high-level summary of additional provisions, however it is not an exhaustive list.
Historically, the penalty for failing to take a required distribution from a retirement account was 50% of the required distribution. That has been lowered to 25% and further lowered to 10% if fixed in a timely manner.
Beginning in 2024, employers can make matching contributions based on employee’s making student loan payments.
In looking at their retirement account, companies with under 100 employees will be incentivized to treat military spouses as if they had been with a company for a longer period of time. This means:
Beginning in 2027, instead of their tax-free disability income becoming taxable income when their pension begins, the amount of the disability income will continue to be tax-free in retirement.
While there are many more provisions in the SECURE Act 2.0, we provide this summary based on what we believe to be the most relevant information for the families we serve. The application of these rules depends on each family or person’s unique situation and it is important to discuss how the changes impact you with a trusted advisor.
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SECURE Act 2.0 - High Level Summary
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Journey Beyond Wealth (“JBW”) is an Investment Advisor registered with the SEC. All views, expressions, and opinions included in this communication are subject to change. Registration of an investment advisor does not imply a certain level of skill or training. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. Please contact us if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions.
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