Secure Act 2.0: Explained

On December 30th, the president signed a new bill - hello 👋 Secure Act 2.0 (I explain Secure Act 1.0 that was passed in 2019 here).

Secure Act 2.0 has A LOT of changes. To help my readers, I narrowed down to the ones that I believe will most likely impact you and your family most, with my personal POV woven throughout. I made the headlines straightforward, so if it doesn’t apply to you, just skip to the next one. There is one in particular I’m OBSESSED with..…you’ll know when you find it!

EMPLOYERS CAN NOW MATCH 401k CONTRIBUTIONS AS ROTH

If you are one of the lucky people whose employer matches your 401k/403(b) contributions, you may have noticed the match has always been pre-tax regardless if you are contributing to your 401k pre-tax OR Roth. Now, employers can match as Roth!

Heather POV: Great! More options that could be beneficial to those that save…so I’m in! I’m curious to see if the match would still be deductible for the employer/business owner (I would hope so). 

ROTH OPTION FOR SEP & SIMPLE IRAS

Historically, SEPs (a self-employed retirement account) & Simple IRAs could only be pre-tax, but now there is an option for Roth starting in 2023.

MONEY FROM 529s CAN BE TRANSFERRED TO ROTH IRAS

Starting in 2024, you can transfer funds from your children’s 529 to a Roth IRA. 

But first, a few conditions:

• The Roth IRA you are transferring into has to be the same person as the 529 - i.e. Sophia’s 529 funds have to go into Sophia’s Roth IRA - not the parents’ or other siblings’

• The 529 must be at least 15 years old   

• Any contributions and earnings within the last 5 years are ineligible 

• The max transfer allowed in a year is the typical contribution limit ($6,500 for 2023) and is reduced by any contributions for the child in that year towards IRA

• The max in a lifetime to be transferred is $35,000 

• Requires that the child has earned income (same rules currently for anyone to make Roth IRA contributions)

• Income limitations on Roth IRAs, however, do not apply 

Heather POV: WHAT!?! When I read this I could NOT believe it. I did a happy dance. This is the one I’m the most excited about because it impacts all my clients' financial plans who have 529s for their kids (including myself) in a good way. There are so many planning opportunities here! Many of my client’s underfund their kid’s 529s (to my dismay) because they are concerned about what happens if their kids don’t go to college and/or need the funds for school. When this happens then that money is tied up in the 529 or you pay penalties if it’s not used for college. Well, here is an amazing solution. Now, in the Townsend Family Financial Plan (the one I can talk about) I WANT to overfund Sloane & Sophia’s 529s because I want to build them Roth IRAs too and I’m not as concerned if a little is left over. That said, we still need more information on this. For instance, what if you change the beneficiary to yourself? Does the 15 year clock start all over? Can you transfer the funds to your own Roth IRA? 

Planning Opportunity: If you have had a 529 for 15 years or more, consider this if you have surplus saved for your kids’ college. Also, parents who have a 529 for their kids may want to consider overfunding their kids’ 529s to take advantage of this (my plan). 

New Ways to Access Retirement Funds BEFORE Retirement…Penalty Free!

Normally if you tap into your retirement before you are 59.5, you pay a 10% penalty (ouch!). The government wants to discourage you from using those funds for anything other than retirement (makes sense, right?). However, there have always been a few exceptions to the penalty (higher education, medical expenses, death, disability) and now they have expanded them to include: 

• Emergency Withdrawal - Beginning in 2024, if you experience “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” you can pull $1,000 penalty free. It’s limited to one time per year and has to be fully repaid (contributions count) or 3 years has passed before you can take another one. 

• Heather POV: Someone could justify this pretty easily every year (who doesn’t have an unexpected expense every year?) but I’m not overly excited about it because the maximum amount is very low. For a lower income taxpayer, it’s really good - now they can choose retirement! $1,000 is not enough for emergency savings, but it’s a start and will hopefully get more individuals' saving for retirement knowing they can tap $1,000 if they need to.  

• Natural Disasters - If your home is within a Federally declared disaster area, you can now take a distribution penalty free within 6 months of the disaster, limited to $22,000. You have the option to spread the income out or repay within 3 years. Also, you have the option to take a loan from your 401k more than normally allowed - 100% of your vested balance (normally you are limited to the greater of $10,000, or 50% of your vested balance/$50,000), but for natural disasters you have a limit of $100,000. Basically, double. Repayment can also be delayed for 1 year.  

• Terminally ill - Individuals just need a letter from a doctor stating the illness is expected to result in your passing within 7 years and it can be repaid within 3 years. 

• Victims of Domestic Abuse - Starting in 2024, victims of domestic abuse can withdraw up to the lesser of $10,000 (indexed for inflation) or 50% of their vested balance. Can be repaid within 3 years. 

• Long Term Care Insurance Premiums - Starting in 2026, individuals can take money out of their retirement to pay for LTC insurance premiums to the lesser of 10% of their vested balance or $2,500 (adjusted for inflation) annually.

• Private Sector Firefighters, State & Local Correction Officers and other forensic security employees who stop working at age 50+ can take penalty free withdrawals. This also includes Public Safety Workers if they have performed 25+ years of service for the employer (in my opinion, this reads like the individual needs to have been at the same employer the full 25 years).

EMERGENCY SAVINGS ACCOUNT LINKED TO EMPLOYER RETIREMENT PLAN

Starting in 2024, employees who are not highly compensated (i.e. highly compensated defined as those who either own 5% of the company, are in the top 20% of compensation with the employer, or made more than $135,000 in the previous year) may contribute to an emergency savings account up to $2,500 and the employer can match on these contributions instead of the 401k if you choose. Distributions will be tax and penalty free.

Heather POV: I’m strongly for this because now laws are aligning with financial literacy - Emergency Savings is necessary!

STUDENT LOAN PAYMENTS CONSIDERED A CONTRIBUTION FOR EMPLOYER MATCH PURPOSES

Starting in 2024, if you can’t afford to contribute to your 401k and take advantage of your employer’s match because of your student loan payments, your student loan payments can now count as “401k contributions.” Example: How a match works is if an employer has a 5% match to their 401k you must contribute 5% for them to match your 5%. Now, if you instead put 5% of your salary to your student loan payments and $0 to your 401k, the employer will now give you the full 5% match to your 401k. 

Heather POV: This is awesome because those with student loans normally can’t save as much as their peers and often miss out on free money from their employer. I imagine many employers will adopt this to attract and retain younger talent.

ITEMS THAT APPLY TO THOSE 50+

*IRA* CATCH-UP CONTRIBUTIONS NOW INCREASE WITH INFLATION

Instead of the standard $1,000 for the allowed max catch-up contribution (if you are over 50yo and have been able to contribute an additional $1,000 to your IRA) it is now subject to COLAs (cost of living adjustment) beginning in 2024. As you can imagine, it will likely be more than $1,000 with the trend we are on here. Get ready for wonky numbers like $1,350!

Heather POV: This is great because in times of high inflation, contribution maxes will  increase for those over 50 to be on par with the current value of the dollar.

*EMPLOYER RETIREMENT PLANS* CATCH-UP CONTRIBUTIONS INCREASED FOR 60+

Starting in 2025, individuals that are 60, 61, 62 or 63 will be allowed to contribute more than those aged 50-59 to their 401k, 403(b), 457 plan. Only individuals 60-63 (so random!) can contribute $10,000 (indexed for inflation) OR 150% of the regular catch-up contribution for 2024, whichever is greater. For example if the catch-up contribution is typically $7,500 - 150% x $7,500 = $11,250 so that would be greater than $10,000 and would be the catch-up contribution for those 60-63. It will remain that until the $10,000 indexed or inflation becomes greater than the $11,250 (150% of the 2024 catch-up contribution). It’s confusing, I know. Don’t worry too much about this because it will be calculated for you in 2025.

HIGH WAGE INDIVIDUALS HAVE TO USE ROTH FOR CATCH-UP CONTRIBUTIONS

Catch-up contribution = Those 50+ who are allowed to contribute more to their employer retirement plan. 

Starting in 2024, high income individuals ($145,000 wage in the previous year - for 2024, think 2023 wage) have to contribute their catch-up contributions in 401ks, 403(b)s & 457s as Roth (i.e. no tax deduction). This does not apply to IRAs. Fun note: it’s the wage tied to that employer’s retirement plan, so if a high wage earner decides to switch employers - bingo! The way it’s written now could allow for 1-2 years of pre-tax catch-up contributions due to the previous year rule because technically, they didn’t have a high income with that employer. Make sense? Oh, the tricks! Also, if your employer’s retirement plan doesn’t offer a Roth component (some 401ks don’t) and you are a high income earner, then you are out of luck! You can’t make catch-up contributions at all because they have to be Roth or nothing. 

Heather POV/Planning Opportunity: Complicated, but definitely opportunities here for high income earners. This isn’t great for high income individuals because now they get less tax deduction and are in the higher tax bracket. But, this gives a *planning opportunity* to self-employed individuals over the age of 50 that have Solo 401ks (my preference over SEP IRAs). In this case, they will want to keep their w-2 wages under $145k so they can contribute their catch-up as pre-tax for a bigger tax deduction (applies to S Corp). 😀

RMD AGE INCREASED 73/75

What’s an RMD you ask? RMD = required minimum distribution. At a certain age you are required to take a certain amount from your pre-tax retirement accounts (accounts where you received a tax deduction when you contributed - this does not apply to Roths). Currently, it's when you reach age 72. Now, this bill pushes it out to 73 (those born between 1951-1959) and age 75 for those born in 1960 or later. 

PENALTY FOR MISSED RMDS GREATLY REDUCED

Before, if you missed an RMD (or pulled too little) you would get penalized at 50% of the shortfall. Now, it’s reduced to 25% and if you correct it in a timely manner to 10% (timely manner is defined - look up “correction window” if you ever get in this situation or ask me). 

Also, the statute of limitations (when the IRS can come after you for penalties) is limited to 3 years for RMD shortfall and 6 years for excess contributions, whereas before it was indefinite. This meant the penalty could be EXTREMELY high if you didn’t catch it for many years - yikes! 

Heather POV: I’m for this. The tax code is ridiculously complex. With constant tax law changes, it is extremely difficult for the average person to get retirement contributions and distributions correct, especially if they don’t have the means to hire someone like myself. In conclusion, I’m all for this!

ROTH RMDS IN QUALIFIED EMPLOYER ACCOUNTS (401k) IS NO LONGER REQUIRED

Previously, one had to take RMDs from Roth 401k/403(b)457 accounts, but not Roth IRAs. Makes sense that there would be different rules, huh? (sarcastic!). Effective as of 2024, this is no longer true - both Roth IRAs and Roth employer plans will no longer require RMDs.

Heather POV: Ah, balance. 

OTHER ITEMS IN THE BILL

These are worth noting but are so specific to a few individuals I’m going to summarize (some of these are just good for the soul - but of course the good ones are the ones most delayed):

• ABLE accounts will be able to be established for individuals who become disabled prior to 46 starting in 2026. 

• Heather POV: Many people become disabled after 25, so this is a good thing!

• Disabled First Responders (firefighters, EMTs, law enforcement) are now able to receive their disability pension or annuity tax-free for LIFE starting in 2027 (originally it was just until retirement and then they would get taxed).   

• Heather POV: Again, ah balance. How it should be. 

• Solo 401ks can now be opened in the year following the previous year to apply to the previous year’s tax return as long as it’s opened before the tax return due date. Basically, you can now open your Solo 401k in 2024, make contributions in 2024 for 2023 to deduct them on your 2023 tax return as long as you haven’t filed your 2023 tax return - YES! Heather POV: One of the only advantages to SEP IRAs over SOLO 401ks just got squashed. 

• Expanded surviving spouse options for retirement accounts - they can be treated as the deceased spouse i.e. RMD rules would apply as if their spouse were still alive.

• Maximum Annual QCD (qualified charitable distributions) allowed will be indexed to inflation starting in 2024. Currently limited to $100k annually.

• Simple IRA contribution limits will be increased by 10% for employers with 50 or fewer employees starting in 2024.

• In 2024, taxpayers can create a SEP IRA plan for household employees (nanny or cleaning person). Heather POV: I love this! If I still have my nanny I’m going to offer this to her! 

• New “Starter 401k” in 2024: Limited to IRA contribution limit and no employer match. I’m not very excited about this one.

My closing thoughts:

As if retirement accounts weren’t already complicated enough, I’m sad to say they just got more complicated which is compounded by all the different dates each item takes effect. I’ll be referencing this blog myself. Also, it’s starting to seem like the government wants more tax revenue now vs. later. In the end, some of the changes are good and allow me to bring even more value to my clients...you!

If you aren’t a client of mine and want someone on your team to review your plan when these new laws come out and keep track of this so you can take advantage - schedule a free intro call here.