The Secure Act of 2022
The SECURE Act 2.0 of 2022, a bipartisan retirement savings bill, was included in the $1.7 trillion budget bill that President Biden signed on December 29, 2022. The retirement savings law makes numerous changes to the current rules governing retirement accounts. Therefore, we anticipate that the SECURE Act 2.0 will reshape retirement tax incentives for years to come. This includes some related tax breaks and covers 401(k), 403(b), IRA, and Roth accounts, among others. And those modifications might influence your personal finances and retirement savings. Our retirement experts at Hennion & Walsh will lead you in the right direction. We’ve compiled a list of the most essential changes to note.
According to the legislation’s proponents, the SECURE Act 2.0 modifications aim to encourage more workers to start retirement savings. However, there is concern that some SECURE Act 2.0 provisions favor high-income earners over others.
Required Minimum Distributions (RMDs)
One of the most notable changes from the original SECURE Act was raising the age at which retirees need to take required minimum distributions, or RMDs. SECURE Act 2.0 raises the age again. Beginning on January 1 of this year, retirees may now wait until age 73 (up from age 72). This is important because it gives retirees an additional year to benefit from the tax advantages that come with IRAs before making mandatory withdrawals. (Note that anyone who turned 72 last year will still need to continue taking RMDs as previously scheduled.) Per the new law, the RMD age will increase to 75 beginning in 2033.
Another noteworthy change imposes a penalty on those who fail to take their RMD or don’t withdraw enough. Previously, the penalty was 50% of what the retiree should have withdrawn. Starting this year, the penalty reduces to 25%. If you correct the mistake within the proper ‘Correction Window,’ the penalty further reduces to just 10%.
Finally, the law eliminates the need to take RMDs from Roth accounts that are inside qualified employer plans. What does that mean in English? It means that if a retiree owns a Roth through their old employer, they need never make mandatory withdrawals during their lifetime. This change begins in 2024. (Note, of course, that regular Roth IRAs not part of an employer plan were never subject to RMDs to begin with, so this change does not apply.)
Catch up contributions increased (must be made on a Roth basis)
According to the Secure Act, participants 50 and older can add an extra $7,500 annually to their 401(k) account starting in 2023. Starting in 2025, this sum will rise to $10,000 annually (indexed for inflation) for participants ages 60 to 63. Additionally, beginning in 2023, participants who make more than $145,000 a year must make all catch-up contributions on a Roth (after-tax) basis.
Incentivizing 401k participation
Today, employers can only currently offer matching contributions (also known as 401k match) as a perk for joining a retirement savings plan. Employers may provide modest financial incentives, such as gift cards, which may help increase participation, starting with plan years beginning after 2022. Financial incentives should be negligible and one cannot use plan assets for payment.
Emergency savings accounts within retirement plans
In order to allow non-highly compensated employees to make Roth (after-tax) contributions to a savings account within the retirement plan, retirement plans may start to offer linked “emergency savings accounts” as of 2024. Plan rules must permit distributions from emergency savings accounts at least once each month. Withdrawal transactions do not incur penalties and do not require proof of a legitimate emergency. The same matching contributions that apply to elective deferrals must also be available for employee contributions to emergency savings accounts. Employers make matching contributions to the retirement plan, not to the emergency savings account. Upon termination of employment, the participant can distribute any emergency savings account or convert it to another Roth account under the plan.
This clause addresses a common criticism of retirement savings participation. For instance, if a worker worries that unplanned emergencies might require them to use any retirement contributions. On these clauses, the Treasury Department and/or the Department of Labor may issue guidance.
Early withdraws to cover emergency expenses
Early distributions from tax-preferred retirement accounts, like 401(k) plans, typically incur an additional 10% tax. The Act also includes an exception for certain distributions for emergency expenses. These are typically unanticipated immediate financial needs related to personal or family emergency expenses. This provision starts in 2024 in addition to the emergency savings account option mentioned above. A taxpayer may choose to repay the distribution within three years and is limited to one $1,000-or-less distribution per year. During the three-year repayment period, no additional emergency distributions may be made until all sums previously taken have been paid back. Absent actual knowledge to the contrary, the employer may rely on an employee’s written certification that the employee is dealing with a qualifying emergency personal expense.
Other Provisions to Note
Here’s an interesting provision: Starting in 2024, individuals may transfer money from a 529 plan into a Roth IRA. This could be useful if you own a 529 plan that has more funds than you or your loved one needs to pay for an education. Think of it as a way to add more flexibility to your long-term finances.
It’s important to note, however, that this provision comes with a lot of terms and conditions. For example, the Roth IRA must be in the same name as the beneficiary of the 529 plan. Furthermore, no transfers can be made until the 529 plan has been maintained for at least fifteen years. There are also very specific limits on how much money can be rolled over. So, if you ever intend to make use of this provision, my advice is to talk to me first so my team can help you through the process.
The SECURE 2.0 Act introduces about 90 changes to the previous statutes; their applicability should be carefully examined. Certain provisions might necessitate modifying current retirement offerings and plans. Employers should seek the advice of qualified legal and financial experts to identify any changes that must be made and to ascertain which optional provisions might be advantageous. Hennion and Walsh has dedicated client service professionals ready to walk through the next steps.
Let Hennion and Walsh offer a second opinion
We’ve outlined the most essential changes, but the new law is extensive. Curious to learn more? Our unmatched client experience will give you peace of mind. Just as you may seek a second opinion about your health, we believe successful investors can gain value and peace of mind by getting a second opinion on their financial health. So, whether you’re worried about today’s uncertain economic environment or looking for increased peace of mind, we can help. Get a complimentary second opinion on all your retirement accounts not held at Hennion & Walsh today!
Hennion & Walsh Experience
We have investment professionals, planners, and portfolio managers that can collectively analyze your situation through the lens of their respective disciplines. Each member brings valuable insights to apply to your situation. Whether you are looking for income strategy guidance or growth strategy guidance, a second opinion of all your retirement accounts not currently held at Hennion & Walsh could be beneficial to your financial health. Give us a call today at (800) 413-6413 and get started.
Disclosures:
Hennion & Walsh Asset Management currently has allocations within its managed money program, and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.
