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There are 3 key moves to consider with new the SECURE Act 2.0

by Susan Wright | Contributor
January 04, 2023


Even if you have built up a nice retirement portfolio, there are a number of areas where you have no control - but that could have a significant impact on your money, and ultimately on your financial future. One of the biggest scenarios has to do with various tax advantages, as well as when you are (or aren't) allowed to start taking distributions from different types of retirement accounts.

For instance, with those who have money stashed in a traditional IRA (individual retirement account) and/or employer-sponsored retirement plan like a 401(k), there could be some big changes on the horizon - and if you aren't ready for them, you might have to make some revisions to your future lifestyle. One of the biggest drivers of the “hows” and “whens” with regard to traditional retirement plans is the SECURE Act. Initially taking effect back in January 2020, this legislation mandated several “tradeoffs” regarding what happens with savings in traditional IRAs and employer-sponsored retirement accounts.

At the end of 2022, the SECURE Act 2.0 was signed into law, so it is critical that you understand what it could mean for your retirement savings and income as well as how to get prepared for it.

Understanding the SECURE Act and its impact on your retirement

The Setting Every Community Up for Retirement Enhancement Act (i.e., the SECURE Act) was approved by the U.S. Senate and signed into law in mid-December 2019 - and it became effective Jan. 1, 2020.

One of the primary goals of this measure is to increase access to tax-advantaged retirement savings and essentially help to prevent older Americans from outliving their assets (which is one of the biggest concerns on the minds of retirees and investors today).

With that in mind, a key incentive for retirees - and those who are approaching retirement - is the pushback of the age in which you must start taking required minimum distributions from traditional IRAs and employer-sponsored retirement plans.

For many years, traditional retirement plan and IRA account owners had to start withdrawing money at age 70½. In addition, at that time, no more contributions into these plans could be made. So, without these pre-tax contributions, traditional plan participants could lose a nice income tax deduction.

ELderly woman working on retirement documents

And what happened if traditional retirement plan owners did not take their required minimum distributions?

They would face a penalty from the IRS. In this case, the amount that was not withdrawn would be taxed at 50%. Therefore, if your required minimum distribution (RMD) in a given year was $60,000 and you only withdraw $30,000, the other $30,000 that was not accessed from your traditional accounts would incur a tax of 50%.

While the original SECURE Act did not do away with required minimum distributions altogether, it did move the beginning age back from 70½ to 72 - which gave traditional IRA and retirement plan holders an additional 18 months before having to make these taxable withdrawals.

The SECURE Act added a couple of other benefits for individual investors, too, including:

  • The go-ahead for making traditional IRA and retirement plan contributions past age 72
  • Penalty-free withdrawals of $5,000 from 401(k) accounts to help with defraying the costs of either having or adopting a child
  • Allowing the use of tax-advantaged 529 college savings accounts for repayments of qualified student loans (up to a limit of $10,000 per year)

In addition, taxpayers who had high medical bills were also able to deduct unreimbursed expenses that exceeded 7.5% (in 2019 and 2020) of their adjusted gross income. Also, individuals were allowed to withdraw money from their qualified retirement plans and IRA accounts penalty-free in order to cover expenses that exceed this threshold (although it is important to note that regular taxes applied, and that the threshold returned to 10%, from 7.5%, in the year 2021).

The SECURE Act also added some nice benefits for small business owners and employees, as well. For instance, if you own a small company, this legislation made it easier to administer - and less expensive - to set up “safe harbor” retirement plans. These types of plans ensure that all eligible plan participants receive an employer contribution.

Further, many part-time workers became eligible to participate in employer retirement plans thanks to the original SECURE Act. In this scenario, even if you worked less than 40 hours per week, you could still be allowed to save and invest in a tax-advantaged manner through your workplace. Here, for instance, those who worked either 1,000 hours per year or who have at least three consecutive years of employment with 500 hours of service each year, were allowed to participate in the employer's retirement plan.

The original SECURE Act also encouraged retirement plan sponsors to include annuities as an option in workplace plans by reducing their liability if the issuing insurance company is not able to meet its financial obligations.

Because annuities are virtually the only financial vehicle that can guarantee the payment of lifetime income - regardless of what happens in the market, or how long the recipient needs it - this can be a definite plus for employee/investors.

But, while the 2020 SECURE Act legislation provided many enticing benefits, the government rarely (if ever) just gives anything away for free - and this is certainly the case here. For instance, one of the biggest drawbacks to the original SECURE Act is the elimination of the “stretch IRA.”

Oftentimes, when an individual passes away, one or more beneficiaries will inherit the decedent's IRA funds. In the past, beneficiaries could take withdrawals from the inherited IRA, based on their own life expectancy. Therefore, if the beneficiary was relatively young, they could withdraw smaller amounts of money from the IRA over time, and in turn, pay less in taxes.

A “stretch” IRA strategy was frequently used in the past to help ease the burden of excessive taxation all at one time by “stretching out” the inherited IRA distributions throughout the beneficiary's own lifetime.

Using a stretch IRA also allowed for continued tax-deferred growth for the funds that were still inside of the account. So, even though the beneficiary's distributions would eventually be taxed, the tax deferral provided the opportunity to grow and compound the funds inside of the IRA until they were actually accessed.

Now that the SECURE Act has had some time to simmer, the government is making some significant changes to it in the form of a SECURE Act 2.0 - and the revisions take effect starting in 2023.

So, what could happen to your retirement savings with the SECURE Act 2.0 law?

Changes coming with the SECURE Act 2.0

The SECURE Act 2.0 is the largest bill covering retirement in the U.S. in more than 15 years. This bill builds on changes that were enacted in early 2020, via the original SECURE Act. Some of its key highlights include the following:

  • Increasing the amount of savings that investors who are age 50 and older can set aside for their retirement
  • Raising the number of small businesses that offer retirement plans - primarily by automatically enrolling employees in 401(k) accounts
  • Providing a “matching contribution” (up to $2,000) from the federal government for workers who earn under $71,000 per year
  • Allowing tax-free and penalty-free withdrawals for emergencies from 401(k) retirement plans
  • Offering lower-paid workers a separate emergency savings account through their employer
  • Further raising the age for required minimum distributions to 73 in 2023 and to 75 in 2033
  • Reducing the penalty for not taking required minimum distributions (RMDs) from 50% to 25% of the amount that is not accessed and down to 10% if corrected in a timely manner from IRA accounts
  • Allowing for additional charitable gifting that counts toward your required minimum distribution(s)
  • Providing contributions from employers that are based on their employees' student loan payments

What to anticipate with the SECURE Act 2.0's provisions

There are many changes to retirement saving as a result of the SECURE Act 2.0, so it is possible that one or more of them could have an impact on your current and future savings and retirement income sources.

For instance, IRAs and employer-sponsored retirement plans allow investors who are age 50 and older to make higher maximum annual contributions than those who are younger. Based on the SECURE Act 2.0, the amount of these “catch-up” contributions would be increased, starting in 2025.

Maximum Annual Contributions for IRAs and Employer-Sponsored Retirement Plans (in 2023)

IRA Accounts 401(k) and Other Employer-Sponsored Retirement Savings Plans
Age 49 and younger IRA Accounts$6,500 401(k) and Other Employer-Sponsored Retirement Savings Plans$22,500
Age 50 and older IRA Accounts$7,500 401(k) and Other Employer-Sponsored Retirement Savings Plans$30,000

On Jan. 1, 2025, as a result of the SECURE Act 2.0, investors who are age 60 through 63 could make catch-up contributions of up to $10,000 per year to a workplace plan. This amount will then be indexed for inflation going forward.

With the SECURE Act 2.0, businesses that adopt new 401(k) and 403(b) plans in 2025 or thereafter will have to automatically enroll their eligible employees, beginning with a contribution rate of at least 3%.

The SECURE Act 2.0 also includes a federal government “match” of 50% (up to $1,000) to be deposited into the retirement accounts of workers who earn less than $71,000 per year.

There are also some provisions in the SECURE Act 2.0 that have to do with money for emergencies. In this case, employers will have the option to offer their lower-paid workers a savings account that is linked to the employees' long-term retirement plans. Plus, the employer can make a contribution to these accounts on behalf of their employees.

Further, the employees can take four penalty-free withdrawals each year from these accounts, beginning in 2024. These withdrawals by the employee will be free of income tax, in turn, giving them more net spendable cash to use.

Another key update that with the SECURE Act 2.0 is the increased age at which required minimum distributions from traditional IRAs and retirement plans must start. In this case, the RMD age goes up to 73 as of Jan. 1, 2032, and it increases to age 75 in 2033.

An added bonus here includes a reduction in the amount of the IRS penalty for not taking any or all of the required minimum distribution. Plus, if annuity income payments from a traditional retirement plan are being received - and they exceed the amount of a given year's RMD - the overage can be applied to the required minimum distribution for the following year.

Those who plan to make charitable gifts could also see some incentives with the SECURE Act 2.0. For instance, if you make contributions based on the qualified charitable distributions (QCD) rule, you could elect a one-time gift of up to $50,000 that can count toward your annual required minimum distribution.

Investors who are strapped with student loan debt could also see some relief, as well as the ability to add more contributions (or any contributions) to an employer-sponsored retirement plan.

In this case, for example, many employees are not in a financial position to contribution enough to a retirement plan so they can receive their employer's matching contribution. But with the passage of the SECURE Act 2.0, the employer could make contributions to their employees' retirement accounts that are based on the participants' student loan payments.

Overall, if you have any savings stored in a traditional IRA and/or retirement plan, these updates to the SECURE Act could provide you with some potential advantages and drawbacks. So, in order to ensure that you're still moving in the right direction, it is a good idea to become familiar with the SECURE Act 2.0 and make any necessary adjustments to your own retirement plan as soon as possible. Talking over your specific situation and objectives with a financial professional can help.

The 3 things you should do with the SECURE Act 2.0 becoming law

While the SECURE Act 2.0 initiates several big changes, there are some items that you must consider before you move forward with any potential changes, such as:

  1. Planning to increase your “catch-up” contributions into 401(k), 403(b), government plans and/or IRA accounts if you are age 50 or older. If you fit in this category, putting more contributions into traditional retirement plans will allow you to take tax deductions in the years that you make such deposits and continue receiving tax-deferred growth inside of the accounts.
  2. Determining whether or not you need to access money from traditional IRAs and/or retirement accounts, and if so, at what age. If you do not need the money in your traditional retirement savings accounts for your living expenses, you can hold off for a bit longer before you're required to start making withdrawals. Even then, though, you could use charitable giving strategies and/or in-plan annuity withdrawals to ease the tax burden on RMD withdrawals.
  3. Calculating whether or not you have enough money in an emergency account (and if not, deciding on whether to add funds via a defined contribution retirement plan through your workplace). If you qualify for an employer contribution to an emergency account, it could help to reduce withdrawals from other accounts if you have a costly (and oftentimes unexpected) situation. In this case, you could keep funds in other accounts to continue growing for their originally intended purpose. You could also eliminate the need to put emergency expenses on high-interest credit cards (which could require you to pay much more in the long run).

How to protect your retirement savings through the SECURE Act 2.0

The SECURE Act 2.0 provides you with a number of benefits in terms of your retirement savings and income. But just like most other IRS legislation, there can be some “small print” involved that could make all the details difficult to understand. Because of that, it is recommended that you work through the provisions with a financial professional. That way, you can better determine whether or not moving forward with various strategies is right for you.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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