FORT KNOX, Ky. — The Secure Act was written into law December 29, 2022. Standing for “Setting Every Community Up for Retirement Enhancement,” the act is designed to improve retirement-saving opportunities.
There are over 90 new provisions in the act used to promote savings, boost incentives for businesses and offer more flexibility for all individuals saving long-term for retirement. The legislation is said to impact every American at every age.
A recent survey conducted by The Federal Reserve revealed only 75% of non-retirees have any type of retirement savings. Could America be facing a retirement saving crisis? The Secure Act is Congress’s latest attempt to address this issue.
Some may be wondering, “What is the Secure Act?” According to Jim Probasco in Investopedia, it “is a law designed to substantially improve retirement savings options—including 401(k)s and 403(b)s.”
The act has three goals: Get people to save more for retirement; improve retirement rules; and lower the employer cost of setting up retirement plans. These new changes have incorporated a new retirement terminology, called the “Rothification” of money.
Several new financial strategies have been integrated in this new legislation. Here are some key points to consider. Let’s highlight the transitions and take time to see if some of these may affect you.
1) Automatic 401(k) transfers — This change will have the biggest impact in retirement outcomes down the road.
· For those who have smaller account balances, Secure Act 2.0 now allows automatic transfers of any previous retirement accounts with balances under $5,000 to your new employer’s plan. This creates the convenience of keeping all your assets in one place to better track retirement savings from previous employers.
· In 2025, Secure 2.0 will require employers to automatically enroll eligible employees into a 401(k) or 403(b) plan with a participation of at least 3% but no more than 10%. The contribution escalates at the rate of 1% per year up to a minimum of 10% and a maximum of 15%. Employees will not be able to opt out.
2) No more age limit for IRA contributions
· Anyone working and has earned income may contribute to a traditional IRA regardless of age. This is intended to help older retirees who may wish to keep contributing to their IRAs.
3) Roth matching
· Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts. Previously, matching in employer-sponsored plans was made on a pretax basis.
4) Better catchup contributions
· If you are age 50 or older, catch-up contribution limits currently allow an additional $1,000 contribution for savers, according to the IRS provision. This bonus is designed to help older workers who are behind on their retirement savings goals.
· There will be a new catchup contribution limit under Secure Act 2.0 starting in 2025. The new catchup for older participants ages 60-63 will allow them to contribute $10,000, or 150% of the “standard” catchup amount, for that year.
· Today, you can put catch up contributions in either pretax accounts or after-tax Roth accounts. Starting in 2024, all catchup contributions must be deposited into Roth accounts, with exception to employees with an annual income of $145,000 or less.
· New – IRA catchup contributions will be based on cost-of-living increases. Increases will be rounded down to the nearest $100. For example, if the annual cost of living adjustment suggested raising the limit to $1,257, the actual catchup contribution would be set at $1,200.
5) New required minimum distribution RMD rules
· Previously, you were required to take withdrawals from a traditional IRA by April 1 of the year after you turned age 70½. Now, if you were born on or after July 1, 1949, your RMD is age 72. If you were born on or before June 30, 2049, your RMD remains at 70½. This allows the IRA owners to defer withdrawals longer in hopes of additional growth of their IRA assets.
· RMD increased to age 73 this year and will increase to 75 in 2033.
· The excise tax or penalty you will pay for failure to take the required RMD will be reduced from 50% to 25%.
· Pre-death RMD for the owner is eliminated.
· NOTE: Unlike Roth IRAs, RMDs from an employer-sponsored plan are required for Roth accounts until Tax Year 2024.
6) Inherited retirement account distributions
· Before the new law, those who inherited IRAs could stretch out withdrawals and required tax payments over their life expectancy. Now, unless the beneficiary is an “eligible designated beneficiary,” inherited account distributions are required to be taken within 10 years.
· Review your estate strategy to see who an eligible beneficiary exception is, to include:
i. The surviving spouse
ii. Minor child
iii. Disabled or chronically ill individual
iv. Beneficiaries who are no more than 10 years younger than the IRA owner
· For those who make more than $145,000 per year, contributions must be made after tax dollars (the Roth tax treatment); expected to begin Dec. 31.
i. With Roth IRA, distributions to heirs are generally tax-free.
ii. Now, when converting traditional IRA to Roth IRA, you are required to pay income taxes impacting your income and tax rate.
iii. When you pass on the traditional IRA, your heirs must pay taxes on the assets distributed from the account over a 10-year period. This may mean increasing not only the size of the distribution, but potential taxes owed.
7) Emergency savings
· For eligible participants, the new plan enables one to add a rainy-day fund or emergency savings account (ESA). This “defined contribution” plan is funded with post-tax Roth contributions. Participants will automatically be enrolled up to 3%.
· ESAs may be invested in “safe investments,” such as cash, interest-bearing deposit accounts and principal preservation accounts.
· Contributions are capped at $2,500 (and indexed for inflation) annually starting Jan. 1, 2024.
· Participants can take at least one withdrawal per month, and the first four withdrawals in a year cannot be subject to fees.
· Many are aware of the IRS restrictions on early withdrawals from retirement savings and being subject to a 10% excise tax. Beginning Jan. 1, 2024, plans will permit participants to withdraw up to $1,000 (once per year) for unforeseeable and/or immediate financial needs related to personal or family emergency expenses without incurring a 10% penalty. The employee can repay the withdrawn amount within three years of the distribution.
· Depending on plan rules, contributions may be eligible for employer match.
8) Qualified charitable distributions (QCDs)
· Beginning this year, people who are age 70½ and older may elect a one-time gift up to $50,000 to a charitable unitrust, a charitable annuity trust, or charitable gift annuity to receive a QCD.
· Nontaxable distributions from an IRA are paid directly from the IRA to a qualified charity.
· NOTE: Funds must come directly from your IRA by the end of the calendar year, but not all charities qualify to receive QCDs.
9) Employer match for student loan payments
· Beginning in 2024, an employer will be able to match employee student loan payments.
· For many, large loan payments could keep employees from saving. Secure Act 2.0 allows employers to consider student loan payments as an elective retirement contribution for the purpose of making employees eligible for matching contributions.
10) 529 college savings plans to IRA conversions
· The 529 can now be rolled over to a Roth IRA.
i. For some time, those who have contributed to 529 plans have feared over-funding. The money grows tax-free, but it only offers an income tax deduction for contributions within certain states. AND, if money isn’t withdrawn for qualified educational expenses, you could incur a 10% penalty.
· Secure Act 2.0 states you can convert up to $35,000 saved in the 529 (that must have been open 15 years) to a Roth IRA with no penalties. The amount rolled over is tax and penalty-free.
· Rollovers are subject to Roth IRA annual contribution limits and cannot exceed the designated beneficiary’s earned income for the year.
· NOTE: Contributions and earnings made within the last fives years are not eligible for the rollover.
11) Expanded access to retirement funds
· Domestic abuse victims can withdraw the lesser of $10,000 or 50% of their retirement account without penalty beginning Jan. 1, 2024.
· Victims of natural disaster, if it is qualified as a federally declared disaster, can withdraw up to $22,000 from their retirement account without penalty. The withdrawal is treated as gross income over three years.
· Prior to the new law, if you took a withdrawal from your IRA or 401(k) before age 59½, the amount would usually be subject to income tax and a 10% penalty. The IRS allows penalty-free early distributions for some types of retirement accounts for specific purposes. Now, after the birth or adoption of a child, there is no penalty for withdrawing funds, and you can repay the funds as a rollover contribution. Income tax will be due on the distribution if it is not repaid to the account.
Statistics reflect that more people are working longer because of limited pensions. If you are raising children, struggling with an illness, or inflation is eating away your income, now is the time to review where you are and where you need to be financially. Many of the items in this document may apply to you.
Just remember, a Secure Act retirement should be pointed in a direction to achieve your financial goals.
Since everyone’s tax situation is different, always consider consulting with a financial advisor, tax consultant or estate planning professional. Pay attention to what is going in the world around you and frequent changes that are being implemented. Determine adjustments or financial changes you need to incorporate as you strategize. And above of all else, ask yourself if you are you on track with your retirement security.
By adopting some of these optional features, you may find a more successful retirement.
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Editor’s Note: Those who have personal financial questions or need assistance can contact Financial Readiness at Army Community Service. Counselors are available to provide financial education and individual advice to the Fort Knox military community. For more information or to schedule an appointment, call 502-624-5989.
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