Everything You Need to Know About Secure 2.0

Retirement planning just got a little bit easier. Key Takeaways:

• Congress recently passed the Secure Act 2.0, which will bring positive changes to many retirement account holders
• Some of these changes apply immediately, while some won’t kick in for a few years
• There are also changes for 529s and gift tax exemption rates

With the Secure 2.0 Act now signed into law, it’s worth taking some time to understand the provisions that could help boost your retirement prospects. It continues the work of previous legislation that let workers opt for an annuity in their savings plans and raised the age when retirees have to take required minimum distributions (RMDs).

A few other exciting features of the act include increases to the catch-up contributions for older workers with employer-matched plans, incentives to make it easier for young people to pay off student debt while saving, rules that allow workers to establish emergency funds in their retirement accounts and to transfer accounts to new employers.

Now, let’s dig deeper into some of the more significant headlines from the new law.

Revitalized 401(k) and 403(b) plans

The law compels companies with 401(k) and 403(b) plans to automatically enroll any eligible employees starting in 2025 at a contribution rate of at least 3%. That rate will increase by 1% annually to at least 10% and as high as 15%. Workers can now also transfer their account balances to a new employer. All preexisting 401(k) and 403(b) plans will be grandfathered into these new rules.

The only exceptions are businesses with ten or fewer employees, businesses that have been up and running for fewer than three years, and plans offered by religious organizations.

These new provisions will be most helpful for savers with low balances because they usually cash out their plans when changing jobs. Now they can easily move it to another plan and grow their savings. As such, the bill is expected to boost retirement savings by billions over the next ten years, including $40.5 billion for new workers with boosted auto-enrollment.

Workers can opt out of the automatic enrollment and automatic escalation provisions, but most tend to continue saving once they start.

Higher catch-up contributions

Also starting in 2025, employees ages 60 through 63 can make catch-up contributions of up to $10,000 annually to their employer-sponsored plan. Currently, the catch-up figure sits at $7,500. This amount will now be indexed to inflation. The only catch is that if you brought in over $145,000 in the previous year, your catch-up contributions need to go into a Roth account in after-tax dollars. If you made less than that, this requirement doesn’t apply to you.

If you have an IRA and are 50 and older, your catch-up limit is $1,000. Next year that gets indexed to inflation, which means it will likely go up every year, depending on what the government sets as its annual cost-of-living increase.

New and improved RMDs

The age when your required minimum distribution (RMD) kicks in is now 73, up from 72, giving retirement account holders an extra year of freedom from mandatory withdrawals of deferred savings. In other good news, the penalty if you don’t take the RMD has gone down from a whopping 50% of the RMD amount to a more reasonable 25%.

For IRA owners, the penalty goes down to 10%, provided that the owner withdraws the proper RMD amount and promptly submits a corrected tax return. And Roth accounts in employer plans will have no RMD requirements starting in 2024. Finally, effective in 2023, for any in-plan annuity payments over the plan’s RMD amount, the extra can go toward that year’s RMD.

A boon for students

A 529 plan is a great way to save for your child’s college education, and they just got a little more flexible. After 15 years, your plan’s assets can go into a Roth IRA for your child with an aggregate lifetime limit of $35,000 and subject to annual Roth contribution limits. The rollover counts against your annual Roth IRA contribution limit, and you can’t roll over more than the aggregate before the five-year period ending on the date of the distribution.

If college is but a fond memory, but your student loan debt is all too real and present, there’s some good news for you as well. Starting next year, your employer can match your student loan payments within your retirement account. This means it’s in your best interest to keep saving for retirement even as you pay off student loan debt.

Higher gift tax exclusions

A yearly exclusion is the level of gift you can give without paying a gift tax or hurting your credit, whether it’s cash or other assets. This year, that exclusion rises from $16,000 to $17,000.

And some forms of gifts incur no tax at all, including:

• Gifts lower than the annual exclusion
• Gifts to a spouse
• Gifts to political organizations
• Medical expenses
• Tuition

You can also deduct gifts to qualifying charities. Starting this year, if you’re age 70 1/2 and older, you can make a one-time gift of up to $50,000 as part of your qualified charitable distributions (QCDs) to a charitable gift annuity, a charitable remainder annuity, or a charitable remainder unitrust. This also goes toward your RMD.

Additional Info: The Generation-Skipping Transfer Tax

The generation-skipping transfer tax stops donors from skipping their children and giving to their grandchildren (and thereby dodging estate taxes). Grandchildren can receive a generation-skipping transfer if they are at least 37 1/2 years younger than the person giving the gift. The rate currently stands at 40%, and the current exemption has gone up from $12.06 million to $12.92 million for individuals and $24.12 million to $25.84 million for married couples.

Professionals can help sort through Secure 2.0

The Secure 2.0 Act will no doubt allow many individuals to save more for retirement. But everyone’s retirement needs are different, and they therefore require different plans and financial strategies to maximize their savings.

The experienced wealth advisors at Lindberg & Ripple are ready to help map out a plan to make the most of the Secure 2.0 Act with a customized approach that fits your needs. Get in touch today to learn more.