Important News from the Secure Act 2.0

Important News from the Secure Act 2.0

The Secure Act 2.0 made sweeping changes to retirement savings plans beginning in 2023. The bill was signed into law on Dec. 29 by President Joe Biden and came with positive news. Overall, the act makes more Roth IRA dollars available, allows more money to be saved, and gives individuals more time to do it. 

RMD News

Starting this year, the Required Minimum Distribution (RMD) age is 73, compared to 72 in 2022. As life expectancy in the U.S. increases, people no longer need to take out retirement savings as early as they had previously. The RMD age has gradually increased over time and is set to reach 75 by Jan. 1, 2033.

The good news is that if you turn 72 in 2023, you just earned another year without worrying about taking an RMD. However, if you turn 73 in 2023, you have two options: Take your first RMD by Dec. 31, 2023, or delay it by April 1, 2024. It’s important to remember if you chose to delay your RMD to 2024, you would have to take two withdrawals that year. 

For example, say Steve turned 73 on July 1, 2023. He decides to delay his RMD until March 2024 to satisfy his 2023 required withdrawal. He can do that, but he must also take another RMD by December 31, 2024, to meet the 2024 required withdrawal.

Additionally, the steep 50% penalty for failing to take an RMD will decrease to 25% of the RMD amount not taken. If the account holder takes corrective action, it can be reduced further to 10%.

More Roth Dollars Available

For small businesses starting this year, both SEP and SIMPLE IRA contributions can now be made on an after-tax (Roth) basis. This allows more money to be saved with the potential of tax-free distributions down the road.

Starting in 2024, employers will also be able to provide vested matches on an after-tax basis (for example, employer contributions to a Roth 401(k)). Currently, contributions in an employer-sponsored plan are made on a pre-tax basis. 

Additionally, 529 plans, investment accounts for qualified education expenses, can now be rolled over into a Roth IRA in the beneficiary's name (subject to annual Roth contribution limits). In the past, if there were unused funds in a 529, this was distributed and taxed. 

For the 529 plans, a lifetime cap of $35,000 can be rolled over, and the account must be open for 15 years before the rollover begins. 

Other Secure Act 2.0 Takeaways 

An expansion was added for the types of charities that can receive a Qualified Charitable Distribution (QCD). Those who are 70 ½ and older may elect as part of their QCD a one-time gift up to $50,000 to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. 

Other updates to employer-sponsored plans that will go into effect in 2024 include matches to student loan payments and a rainy day fund. The first allows companies to “match” an employee’s student loan payment with matching contributions to a 401(k) plan. 

The rainy day fund allows employers to automatically enroll non-highly compensated employees in an emergency savings account linked to a 401(k) plan. A non-highly compensated employee can make up to $150,000 and could save up to $2,500. This account's first four withdrawals in a year would be tax and penalty-free. 

MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct any due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

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