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What You Need To Know About The SECURE Act 2.0

by , | Updated: Jan 19, 2023 | Published: Jan 10, 2023 | Insights

secure act 2.0

What You Need To Know About The SECURE Act 2.0

An Overview Of The Changes And What They Mean For Your Finances

Secure Act 2.0 was signed into law December 29, 2022 as part of a larger omnibus spending bill that was created in order to keep the government funded. The Secure Act 2.0 is meant to build upon the original Secure Act that was passed back in 2019.

The original Secure Act brought about an increase in the Required Minimum Distribution (RMD) age from 70 ½ to 72, the removal of the stretch IRA for inherited IRAs, and the inclusion of some part-time employees in retirement plans. The Secure Act 2.0 brings with it even more changes to retirement funding and accounts.

Thankfully, this act does not take away the Mega Backdoor Roth or Backdoor Roth IRA capability. We have broken down what we believe to be some of the most important inclusions in the Secure Act 2.0 below:

Another increase in RMD age

The second iteration of the Secure Act again increases the RMD age – this time from 72 to 73 for the tax year 2023. It will also be increased to 75 in 2033. It is important to note that those who have already started taking their RMD prior to 2023 are not allowed to stop. This new provision will allow taxpayers to keep their money in tax-deferred accounts longer without the IRS forcing them to make taxable withdrawals.

An Increase in the Catch-Up Contribution Limits

The age that catch-up contributions are allowed to be made will continue to be age 50. However, starting in 2025 the catch-up contribution for 401(k)s and 403(b)s will be increased to the greater of $10,000 or 150% of the catch-up limit for individuals ages 60 – 63. Starting in 2026 the annual catch-up will be indexed for inflation. IRA catch-up contribution amounts of $1,000 will also begin to be indexed by inflation starting in 2024.

One quirk hidden in this section is that if a taxpayer earns more than $145,000, all catch-up contributions at age 50 and older must be made to a Roth account with after-tax dollars. This caveat has been put in place to allow the government to tax more money now instead of allowing taxpayers to delay the taxes until a later date. For more information on the latest tax code, please refer to our 2024 Tax Code Changes article.

529 Plan to Roth IRA rollovers allowed

Some individuals are faced with the dilemma of what to do with unused 529 plan money once a child has finished college. Under the Secure Act 2.0 they are now able to roll 529 college savings plan funds (up to a $35,000 lifetime limit) into a Roth IRA for the 529 beneficiary penalty and tax-free. Please view our 529 to Roth IRA Rollover article for more information.

The 529 account must have been opened for at least 15 years and the funds must be moved to a Roth IRA in the name of the 529 beneficiary. The annual rollover limit is pegged to the yearly IRA contribution limit, which includes contributions made to any IRA. In addition, the amount rolled over plus annual IRA contributions cannot exceed the designated beneficiary’s earned income for the year. The IRS will likely clarify this process in more detail but as it stands this could be a helpful tax and financial planning tool.

The Penalty for missing your RMD is decreasing

Previously if a taxpayer failed to take their RMD the tax penalty was 50% of the amount that should have been withdrawn. This is being decreased to 25%. This penalty is further reduced to 10% if the RMD is corrected in a timely manner for IRAs. Again, the IRS will almost certainly issue guidance on the definition of the term “timely manner”.

No RMD is required on Roth employer retirement plans

Prior to the passing of the Secure Act 2.0, Roth accounts held in employer retirement plans such as 401(k)s and 403(b)s were subject to the same RMD rules as pre-tax assets. With the passing of this new act Roth accounts in employer retirement plans have no RMD requirements for account holders during their lifetime.

401(k) matching contribution based on student loan payments

Many young taxpayers who have student loan debt are faced with the decision to contribute to their 401(k) or to pay off student loans. Under the Secure Act 2.0, 401(k)s are allowed to have provisions that allow employers to contribute to an employee 401(k) in the amount they pay towards their student loans.

This does not mean that it will be offered by all companies 401(k)s as it is a provision that companies must elect to put in their plans. Do not expect smaller employers to offer this provision.

Increase in Qualified Charitable Distribution (QCD) Amount

Previously the maximum allowable QCD amount was $100,000. This amount will start to be indexed for inflation annually. This means that those who are 70 ½ or older and are charitably minded will be able to give more to charities on an annual basis and eliminate taxes on the distributions. For more information on charitable planning, please refer to our Tax-Efficient Tithing article.

Automatic portability of 401(k) accounts

The Secure Act 2.0 is making a push for all 401(k) plans to be automatically portable starting around 2025. This means that if you change jobs and move to a new company your prior 401(k) will be allowed to automatically roll over to your new company’s 401(k) should you elect to do so. This will cut down on the paperwork and logistics of rolling over 401(k)s in the event of a job or career change.

Expanding the use of Roth accounts

The Secure Act 2.0 has greatly increased the ability of taxpayers to store money away for retirement in Roth accounts. The law requires participants to make catch-up contributions to 403(b), 457(b), and 401(a) accounts through a Roth account (unless making less than $145,000). The law will also enable employers to allow employees to elect matching contributions to be deposited to a Roth account versus the current method of forcing all matching contributions to be to a pre-tax account.

Creation of new “Starter K”

This section of the law creates a new 401(k) called the “Starter K”. This plan is supported by the American Retirement Association (ARA) and will help employers that do not currently sponsor a retirement plan offer a starter 401(k) plan (or safe harbor 403(b) plan). There will also be a tax credit available to employers that initiate one of these new plans

Conclusion

The Secure Act 2.0 has just recently passed and there is still a significant period of adjustments as Congress and the IRS “unpack” the various provisions. As usual, once the IRS looks at the law they will come out with more guidelines and interpretations on how to apply the provisions.

As we saw this year with the confusion surrounding the inherited IRA rules as they relate to RMDs, the government will frequently take quite some time to sort everything out. As always, our team is happy to answer any follow-up questions as they arise.

Need Some Help?

If you’d like some help from one of our CPAs or CERTIFIED FINANCIAL PLANNER (CFP®) advisors, the Rhame & Gorrell Wealth Management team is here to help.

Our experienced Wealth Managers can help you review your financial and tax situation and come up with a custom tax optimization strategy going forward – all at no cost to you!

Feel free to contact us at (832) 789-1100, [email protected], or click one of the buttons below to ask a question or schedule your complimentary strategy session today.

 

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JEFFREY G RHAME, CFP®

Managing Director & Senior Wealth Manager

Jeff Rhame is one of the founders and President of Rhame & Gorrell Wealth Management. Jeff’s vision for starting Rhame & Gorrell was to deliver wealth management services and investment strategies typically available at the highest levels of wealth. Today, clients benefit from these sophisticated financial services, targeted to meet their unique needs.

Jeff leads a team of investment specialists that develop asset allocation strategies for high-net worth families. They seek out the most appropriate investment ingredients and then construct portfolios to meet our clients’ goals from income generation and capital preservation to tax-efficiency and growth.

Jeff has been honored with Top Professional’s Five Star Wealth Managers, recognized by The Wall Street Journal and Texas Monthly, for the last 10 years in a row and twice as Best of The Woodlands – Top Financial Advisors and Planners by Woodlands Online. For over 15 years, Jeff served as an adjunct professor for the University of Houston and Lone Star College Systems, teaching classes on Investment Management and Estate & Insurance Planning. As a member of the Financial Planning Association, he has also taught, and continues to teach, on & off-site retirement workshops for the employees of many Fortune 500 companies, such as ExxonMobil, Chevron.

Jeff is proudly serving as a member of three organizations: Memorial Hermann Hospital’s Advisory Board in The Woodlands, The Nelson Rusche College of Business Executive Advisory Board at Stephen F. Austin State University, and as the Vice-Chairman of the Tall Timbers District of The Boy Scouts of America.

Jeff received a degree in Accounting from Stephen F. Austin State University, and through post graduate work at The University of Houston, achieved his status as a CERTIFIED FINANCIAL PLANNER™ practitioner.


JEFFREY G RHAME, CFP®

Partner & Senior Wealth Manager
As a Wealth Manager, Kyle McClain serves on the Investment Committee, interfaces with clients, and coordinates ongoing financial planning initiatives. He also facilitates many marketing and business development functions for the firm.

Prior to joining RG Wealth, Kyle spent time with Fidelity Institutional Asset Management as an Investment Consultant and with Merrill Lynch as a Wealth Advisor. He graduated Magna Cum Laude with a dual degree in Finance and Economics from the University of Alabama. He also completed his CERTIFIED FINANCIAL PLANNER™ program at Texas A&M University, holds the CFP® designation, and has completed his Certified Investment Management Analyst (CIMA®) designation from the Yale School of Management.

 

 

IMPORTANT DISCLOSURES:

Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.  The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice.

For additional information about RGWM, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. Please read the disclosure brochures carefully before you invest or send money.

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