I thought I would summarize the key points to the SECURE 2.0 Act of 2022 and how it affects your financial planning. The key point for most people will be the increase in age for required minimum distributions.
The SECURE 2.0 Act of 2022 is a sequel to the SECURE Act of 2019, which made significant changes to the laws governing retirement savings plans, such as 401(k), 403(b) and IRAs. The new law, which was signed by President Biden on December 29, 2022, as part of the Consolidated Appropriations Act (CAA) of 2023, contains 92 provisions that aim to further enhance the retirement system and Americans' preparedness for retirement.
Here are some of the key provisions:
- Increase the starting age for required minimum distributions (RMDs). The SECURE Act raised the age at which retirement plan distributions must begin from 70 ½ to 72. SECURE 2.0 further increases the age to 73 for individuals who reach age 72 after 2022. The age will be increased again, to age 75, for those who reach age 74 after 2032. This means you can defer taxes on your retirement savings for longer and have more time to grow your nest egg.
- Enhance the new plan startup credit for small employers. The SECURE Act increased an existing tax credit to 50% of an employer's out-of-pocket costs of starting up a plan, to a maximum credit of $5,000 per year for three years for employers with 100 or fewer employees. Prior to the SECURE Act change, which became effective in 2020, the maximum credit was $500. Beginning in 2023, SECURE 2.0 increases the 50% limit to 100% for employers with 50 or fewer employees. This means more small businesses can afford to offer retirement plans to their employees, which can help boost their retention and recruitment.
- Provide tax credits for plan contributions made by small employers. Employers with up to 50 employees that establish a plan will be entitled to a credit for contributions made on behalf of employees whose wages do not exceed $100,000. The credit is available for the first five years the plan is in existence. The maximum credit per employee is $1,000. The credit amount will be phased out for employers with between 51 and 100 employees. This means more small employers can incentivize their employees to save for retirement by matching their contributions.
- Permit employer matching contributions on a Roth basis. Under the Act, defined contribution (DC) plans can add a feature that gives participants the option of having their employer make matching contributions on an after-tax basis to their plan's Roth account. This means more flexibility and choice for participants who prefer Roth contributions over traditional pre-tax contributions.
- Enhance qualifying longevity annuity contracts. A qualifying longevity annuity contract (QLAC) is a deferred annuity contract, purchased with IRA or DC plan funds, whose payments can commence as late as age 85. Before payments from the contract start, QLACs are generally exempt from the required minimum distribution rules. Prior to SECURE 2.0, IRS rules limited the amount that could be used to purchase a QLAC to the lesser of 25% of an individual's account balance or $145,000. Effective December 29, 2022, the Act repeals the 25% limit and allows up to $200,000 to be used to purchase a QLAC. This means more protection against longevity risk and outliving your savings by securing a guaranteed income stream for life.
- Give small incentives for contributing to a plan. Prior to the Act, employers were prohibited from giving any financial incentives to employees to encourage them to contribute to a plan, other than matching contributions. Under SECURE 2.0, employers can offer small incentives, such as gift cards or coupons, worth up to $100 per year per employee, without violating the nondiscrimination rules.
These are just some of the highlights of SECURE 2.0 that may affect your financial planning. There are many other provisions that cover topics such as automatic enrollment, lifetime income options, catch-up contributions, student loan repayments and more.
If you have any questions about how SECURE 2.0 impacts your retirement savings strategy or if you need help with your financial planning in general, please contact me at Rounick Capital Management. I'm here to help you achieve your financial goals and secure your dream retirement.
Sources:
- [SECURE 2.0 Act of 2022 | Definition and Key Provisions](https://www.financestrategists.com/retirement-planning/secure-2-0-act-of-2022/)
- [Personal financial planning summary of SECURE 2.0](https://www.aicpa-cima.com/resources/download/summary-of-secure-2-0)
- [SECURE 2.0 is here. What do you need to know?](https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/defined-contribution/secure-2-0/)
- [What Financial Advisors Can Expect From SECURE 2.0 Act](https://emoneyadvisor.com/blog/secure-act-2-0-what-financial-advisors-can-expect/)
Comments