What to Know About SECURE Act 2.0

Your future self will thank you when you decide its time to retire and you realize you are able to live the life you envisioned. To get to this point, your current self needs to not only remain disciplined in executing your long-term financial plan, but also be regularly reviewed to see if any course correcting makes sense.

The original SECURE Act was signed into law on December 202019. Its “sequel,” the SECURE 2.0 Act, was similarly enacted at year-end on December 29, 2022. These two massive pieces of legislation attempt to assist Americans with retirement preparedness.

Below is an overview of SECURE 2.0’s key components as it may relate to you. Implementation for each SECURE 2.0 provision varies from being effective immediately, to ramping up in future years. A few even apply retroactively. Many of its newest programs won’t effectively roll out until 2024 or later, giving you and your team time to plan.

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Saving More, Saving Better: Individual Savers

First, key provisions include several updates to encourage individual savers:

· Higher Catch-Up Contributions (2024–2025): To accelerate retirement saving as you approach retirement age, SECURE 2.0 Act has increased annual “catch-up” contribution allowances for many retirement accounts (i.e., extra amounts allowed beyond the standard contribution limits); and, importantly, tied future increases to inflation. However, in many instances, the updates also require high-wage-earners ($145,000/year or higher)to direct their catch-up contributions to after-tax Roth accounts.

· An Expanded Contribution Window for Sole Proprietors (2024): If you’re a sole proprietor, you’ll be able to establish a Solo 401(k) through the current year’s Federal income tax filing date, and still fund it with prior-year contributions.

· Potential Tax Error “Do Overs” (2025): To err is human, and often unintentional. As such, SECURE 2.0 has directed the IRS to apply an existing Employer Plans Compliance Resolutions System (EPCRS) to IRAs. The details are to be developed, but the intent is to set up a system in which “most inadvertent failures to comply with tax-qualification rules would be eligible for self-correction.”

· Finding Former Plans (2024): It can be hard for company plan sponsors to keep in touch with former employees—and vice-versa. SECURE 2.0 has tasked the Department of Labor with hosting a national “lost and found” database to help you search for plan administrator contact information for former employees’ plans in case you’ve left any retirement savings behind.

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Spending Today, Saving for Tomorrow

We advise proceeding with caution before using retirement savings for any other purposes, but SECURE 2.0 does include several new provisions to help families strike a balance.

· Transferring 529 Plan Assets to a Roth IRA (2024): This one is subject to a number of qualifying hurdles, but SECURE2.0 establishes a path for families to transfer up to $35,000 of untapped 529college saving plan assets into the beneficiary’s Roth IRA. With proper planning, this may help families “seed” their children’s or grandchildren’s retirement savings with their unspent college savings.

· Relaxed Emergency Loans from Retirement Plans (2023): If you end up living in a Federally declared disaster area, SECURE2.0 also increases your ability to borrow up to 100% of your vested plan balance up to $100,000, with a more generous pay-back window.

· Expanded Eligibility for ABLE Accounts (2026): ABLE accounts help disabled individuals save for disability expenses, while still collecting disability benefits. Before, you had to be disabled before age 26 to establish an ABLE account. That age cap increases to 46.

· A Tax Break for Disabled First Responders (2027): If you are a first responder collecting on a service-connected disability, at least a portion of your disability payments will remain tax-free, even once you reach full retirement age and begin taking a retirement pension.

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Tax Planning Opportunities

Tax planning for your retirement savings is also important. To help with that, you can typically choose between two account types as you save for retirement: Traditional IRA or employer-sponsored plans, or Roth versions of the same.

Either way, your retirement savings grow tax-free while they are in your accounts. The main difference is whether you pay income taxes at the beginning or end of the process. For Roth accounts, you typically pay taxes up front, funding the account with after-tax dollars. Traditional retirement accounts are typically funded with pre-tax dollars, and you pay taxes on withdrawals.

To fill in a few missing links, the SECURE 2.0 Act:

· Eliminates Required Minimum Distributions for employer-sponsored Roth accounts, such as Roth 401(k)s and Roth 403(b)s, to align with individual Roth practices (2024)

· Establishes Roth versions of SEP and SIMPLE IRAs (2023)

· Allows employers make contributions to traditional and Roth retirement accounts (2023)

· Allows families to potentially move 529 plan assets into a Roth IRA (2024 – as described above)

There’s one thing that’s not changed, although there’s been talk that it might: There are still no restrictions on “backdoor Roth conversions” and similar strategies some families have been using to boost their tax-efficient retirement resources.

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Required Minimum Distribution Updates

The government has an interest in accelerating spending from tax sheltered retirement savings accounts, which is why there are rules regarding when you must start taking Required Minimum Distributions (RMDs) out of your retirement accounts. That said, both SECURE Acts have relaxed and refined some of our classic RMD rules.

· Extended RMD Dates (2023): The original SECURE Act postponed when you must start taking taxable RMDs from your retirement account—from 70 ½ to 72. The SECURE 2.0 Act extends that deadline further. If you were born between 1951–1959, you can now wait until age 73. If you were born after that, it’s age 75.

· Reduced Penalties (2023): If you fail to take an RMD, the penalty is reduced from 50% of the distribution to a slightly more palatable 25%. Also, the penalty may be further reduced to 10% if you fix the error within a prescribed correction window.

· Aligned RMD Rules for Personal and Employer-based Roth Accounts (2024): As mentioned above, RMDs have been eliminated from employer-based Roth accounts. If you’ve already been taking them, you should be able to stop doing so in 2024.

· Enhanced RMDs for Surviving Spouses (2024): If you are a widow or widower inheriting your spouse’s retirement plan assets, you will be able to elect to determine your RMD date as if you were your spouse. This provision can work well if your spouse was younger than you. Given this new law, RMDs for the (older) surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin.

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Great News For Charitable Donors

One good thing hasn’t changed with SECURE 2.0: Even though RMD dates have been extended as described above, you can still make Qualified Charitable Distributions (QCDs) out of your retirement accounts beginning at age 70 ½. The income is still excluded from your taxable adjusted gross in come, as well as from Social Security tax and Medicare surcharge calculations. Plus, beginning in 2024, the maximum QCD you can make (currently $100,000) will increase with inflation.

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Next Steps

The retirement planning landscape continues to evolve and create new opportunities for consideration. Every family’s situation is unique, and a retirement focused financial plan requires regular review, testing, and (sometimes) modification. The SECURE Acts are filled with updates and modifications of which we touched on only a few of them in this article. As such, before you begin adjusting your own plan, we hope you will consult with us or your other trusted advisors to discuss the details specific to your situation.

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_{Disclosures:
The opinions expressed herein are those of Grand Wealth Management and are subject to change without notice. This material is not financial advice or an offer to sell any product. Grand Wealth Management is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Grand Wealth Management's investment advisory services can be found in its Form ADV Part 2, which is located below.}

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