Enhancements Across the Retirement Saving Continuum
Late last year, Congress enacted a new slate of legislature entitled, somewhat unimaginatively, the SECURE 2.0 Act. The intent of this new Act is to increase retirement savings by increasing the various ways to save across the ages. The attention-grabbing highlights from SECURE 2.0 include further delayed RMDs to age 73 for those born between 1951 and 1959 – and age 75 for those born 1960 or later, new Roth savings opportunities, and greater catch-up contributions for those over age 50. While these are certainly important aspects of the law, there’s much more included in this legislation with particular nuances that will create terrific planning opportunities! Overall, SECURE 2.0 tackled retirement savings at many phases of the saver’s financial journey, with a provision to enhance or facilitate saving and investing for almost everyone.
Whether you have student loans or an overfunded 529, need to catch up in the final years before retirement, are facing taking required minimum distributions in retirement, own a small business and are looking for ways to incentivize employees, or want to enact a charitable giving strategy, there are new rules to be aware of that will impact our planning for you. Over the coming monthly newsletters, we’ll highlight and provide examples of some of the more nuanced planning opportunities enacted under SECURE 2.0. You may also hear us referring to new planning opportunities for you this spring as we begin to implement the new law.
For now, we’ll a provide a consolidated and brief explanation of some of what the SECURE 2.0 has in store. As always, please don’t hesitate to be in contact with us should you have any questions.
The Early Stages: Automatic Enrollment, Emergency Savings, Student Loan Matching, and 529-to-Roth IRA Transfers
Automatic enrollment in a retirement plan can mean building up invested savings from the earliest years of a career, which provides the longest amount of time to benefit from the power of compounding. Beginning in 2025, new employer-sponsored plans will be required to automatically enroll eligible employees, with a contribution rate of at least 3%. This is coupled with new rules around portability. These often lower-balance accounts will also be allowed to be automatically transferred to a new plan in the event of a job change.
The 10% penalty on withdrawals from tax-deferred retirement plans often puts saving for retirement in opposition to building up an emergency fund. Not anymore. Starting in 2024, plans are allowed to add designated Roth accounts for emergency savings for non-highly compensated employees. Contributions are limited to a maximum of $2,500. The first four withdrawals in a year from the account will be penalty-free.
Student loan payments can be one of the bigger bites out of the paycheck in earlier career stages. Trying to pay off debt and contribute to retirement accounts is often out of reach. The new law mitigates this by allowing an employer to match student loan debt payoff amounts, so retirement savings can still accrue.
Beginning in 2024, for those that find themselves with an overfunded 529 college-savings account, they will be able to transfer 529 assets into a Roth IRA penalty and tax free, assuming the 529 beneficiary meets a set of conditions. One of the biggest requirements for this 529-to-Roth transfer is that the 529 account must be open for at least 15 years prior.
Late Career Catch-Up Contributions Are Increasing, AND There’s a Bit of a Twist
The catch-up contribution for those 50 and above is one of the best ways to increase your retirement savings in the later years of your career. For 2023, the catch-up amount is increasing to $7,500. In 2024, catch-up amounts will be indexed to inflation, increasing the contribution amount in increments of $100. Beginning in 2025, the catch-up for workers aged 60, 61, 62, or 63 will be even larger. These employees are allowed to contribute the greater of $10,000 or 150% percent of that year’s inflation-indexed catch-up amount.
However, the tax treatment of catch-up contributions is changing. If prior-year earnings are more than $145,000, the age 50+ catch-up contributions must be made with after-tax dollars to a Roth account.
The Decumulation Phase Gets More Flexible
Tax-deferred contributions to retirement accounts lower taxable income in the years when you make them, but the IRS eventually comes looking for their cut via Required Minimum Distributions (aka RMDs). The age to begin required minimum distributions (RMDs) is moving from 72 to 73 in 2023, providing an extra year for some retirees with lower income to take advantage of Roth conversions. The beauty of a Roth conversion often is that amounts converted will lower the value of the IRA account, which will reduce the amount of the RMD, and thereby lower your tax burden.
Beginning in 2033, the age for RMDs will move to 75. This expanded window can provide for significant tax-planning strategies, including the timing of asset sales and more time to convert additional funds to a Roth for income and tax planning.
Inflation Meets Gifting
In 2024, those who are 70.5 years who wish to gift distributions from IRA accounts – also known as Qualified Charitable Donations or QCDs – will be excited to know that the gifting limit will be adjusted for inflation. Currently set to $100,000 annually, this figure will be adjusted to rise with inflation next year.
We look forward to sharing in our meetings this year planning opportunities around these changes that have an impact to you.