SECURE ACT 2.0 – Big changes for retirees and small business owners
While it may seem harder than ever for politicians to find common ground these days, the House of Representatives and the U.S. Senate have reached an agreement on at least one thing: improving the retirement savings options for Americans.
The SECURE 2.0 ACT of 2022 introduces big changes to several retirement savings vehicles. Here is a summary of the changes and some of the potential planning considerations for retirees and small business owners.
Older ages for Required Minimum Distributions (RMDs)
If you were born between 1951 and 1959, the new age at which you must make minimum withdrawals from your retirement account is 73. If you were born in 1960 or later, the new age is 75.1
Being able to delay these withdrawals means you can preserve your retirement accounts for a couple more years and reduce the potentially higher Medicare premiums that would have been incurred from taking them sooner. The new rules also buy you more time to take advantage of taxable Roth conversion strategies if this makes sense for your situation.
Smaller RMD penalties
The penalty charged on any RMD amounts not taken has been reduced to 25% from 50%, which was one of the harshest penalties listed in the tax code. The penalty will be further reduced to 10% if the mistake is fixed within the defined correction window, which is calculated based on several factors.2
Eliminating RMDs on Designated Roth Accounts
Starting in 2024, Designated Roth Accounts, such as Roth 401(k)/403(b) plans, will no longer have RMD requirements. However, these rollovers might still be desirable. While a rollover may be more expensive than the 401(k)/403(b), employer plans may not offer a full suite of investment options, and you may still wish to do a taxable Roth conversion in retirement.3
Indexing Qualified Charitable Distributions (QCDs)
While the QCD age remains unchanged at 70.5, the annual QCD limit will begin to be indexed for inflation beginning in 2024.
In addition, you are now allowed to make a one-time QCD of up to $50,000 to fund a split-interest entity such as a Charitable Remainder Unitrust or Charitable Remainder Annuity Trust. However, there are so many strings attached to this new provision that, in our opinion, there are likely better routes for achieving your charitable gifting goals.4
Indexing IRA catch-up contributions
IRA catch-up contributions will be indexed for inflation beginning in 2024.5
Many changes to 401(k) rules
These plans underwent so many revisions, we will summarize them briefly here. As always, you should speak with your professional advisors about the nuances of these changes and how they may affect your personal situation:
- “Roth” employer contributions (effective immediately). Employer matching/non-elective contributions are now eligible to be treated as Roth contributions. These employer contributions will be taxed directly to the employee and will not be subject to vesting schedules. Note that profit-sharing contributions are not eligible.6
- Mandatory Roth catch-up contribution for high wage earners (effective in 2024). Those with wages exceeding $145,000 will now be required to elect Roth treatment for all catch-up contributions received. As a result, the tax bill for high wage earners will increase due to these contributions being taxed directly to the plan participant.7
- Increased catch-up threshold for participants ages 60–63 (effective 2025). Retirement plan participants who are between the ages of 60 and 63 will now be eligible for enhanced catch-up contribution limits of the greater of $10,000 or 150% of the future (regular) catch-up amount.8
- SIMPLE-to-401(k) mid-year replacement (effective 2024). You will soon be allowed to replace SIMPLE IRAs with 401(k) plans with mandatory employer contributions during the year. This is great news if you have started with a SIMPLE IRA and found yourself needing to wait an entire calendar year before being able to increase your savings capacity with a 401(k).9
- Changes to retirement plan start-up tax credit (effective immediately). Employers with 50 or fewer employees may be able to claim a tax credit, limited to $5,000 for three years, to cover the costs of starting a SEP, SIMPLE IRA or qualified retirement plan. If you are starting a new retirement plan in 2023, this tax credit can reduce the amount of taxes you may owe on a dollar-for-dollar basis.10
- Retroactive Solo-401(k) plan deferrals for sole proprietors (effective immediately). If you are establishing a new Solo-401(k) plan, you may be eligible to make two full deferral contributions—one for this year and one for last year.11
- 401(k) plan auto enrollment (effective in 2025). Employer retirement plans will soon be required to have participants make mandatory contributions based on a percentage of their wages. Employees can opt out of their 401(k) plan if they do not wish to conform. Employers that have existed for less than three years or who have 10 or fewer employees will also be exempt.12
Convert unused 529 plan funds to a Roth IRA
Starting in 2024, you will be able to convert unused 529 plan funds tax-free to a Roth IRA, subject to a variety of conditions, including that the beneficiary and owner remain the same and the plan has existed for at least 15 years, with a maximum lifetime conversion limit of $35,000.13
Here are a few more changes that, in our view, are relatively significant for retirees and business owners:
- 10% early withdrawal penalty from retirement plans waived for terminal illnesses14
- Surviving spouses can now begin RMDs based on the deceased’s RMD schedule15
- Beginning in 2024, employers can offer a matching option to help employees pay down student loans16
- 1099/sole proprietorships/self-employed persons will have access to a “Starter 401(K) Plan” starting in 202417
- There are no longer penalties on distributions taken from retirement plans due to excess contributions as long as changes are made by October 15 of the following year
Retirement planning can be a complex task, and ever-shifting legislation can make it even more challenging. We believe it’s essential to work with a wealth advisor and tax professional who understand not only the latest rules and regulations but also how they can be applied to optimize your personal strategy.
ABOUT THE AUTHOR
Herman Freitag, CFP
Herman is a Wealth Advisor with CI Brightworth. He graduated with a degree in Marketing and a Master's in Business Administration from the University of New Orleans. Prior to joining CI Brightworth, he was with a national investment firm serving high-net-worth clients for four years. Previously he had worked for the private banking and retail arms of a national bank for four years. He earned his CERTIFIED FINANCIAL PLANNER™ certification in 2017. Herman is a native of New Orleans and outside of work he enjoys hiking, fishing, cooking, the outdoors, and traveling.
Andrew is an Associate Wealth Advisor with CI Brightworth Private Wealth and has been with the firm since 2020. Originally from the Northern Virginia area, he attended Virginia Tech and graduated Summa Cum Laude with a degree in Finance under the CFP® Certification Education Option. He obtained both his CERTIFIED FINANCIAL PLANNER™ and Certified Investment Management Analyst® designations in 2021.
Working closely with Small Business Owners, Dental Professionals, and Attorneys; Andrew aims to create financial plans that align with each client's values and goals. By focusing on comprehensive investment and wealth planning strategies, he puts the pieces of the financial puzzle together that allow clients to focus on what matters most to them.
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Different types of investments involve degrees of risk. The future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable or suitable or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees that would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.
Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.