April 25, 2023

In recent years, the U.S. retirement system has faced intense pressures. According to a Federal Reserve survey, in 2021, only 75% of non-retirees have any retirement savings whatsoever. To add to that, only 40% feel that their retirement savings are on track. While that number has improved—it’s up from 36% in 2020—there is still work to be done.¹

In an attempt to relieve some of these pressures, encourage more retirement savings, and simplify the complexity that is our retirement system, Congress has enacted the SECURE Act 2.0. So, what is it? SECURE—Setting Every Community Up for Retirement Enhancement—2.0 was signed into law at the end of 2022, piggybacking on the initial SECURE Act of 2019.

There are many parts to this legislation, but we will focus on some key takeaways.

Increased Retirement Account Catch-Up Contributions – Currently, for employer-sponsored plans, the retirement plan catch-up contribution is $7,500. Starting in 2025, individuals ages 60-63 will be able to make catch-up contributions to a limit of $10,000 to a workplace plan OR 50% more than the regular catch-up contributions amount in 2024, whichever is greater. It’s important to note that there is an income component to this. If you earned more than $145,000 in the prior year, any catch-up contributions for those age 50+ will have to be directed to a Roth account. This means those dollars will be after-tax dollars. The current catch-up contribution for individual retirement accounts (IRA) is $1,000 (for those 50+). In 2024, that limit will be indexed to inflation, which means it will follow the federally determined cost of living increases year over year.

Changes to Required Minimum Distributions – A required minimum distribution (RMD) is the amount of funds that must be withdrawn from an individual’s retirement savings at a certain age threshold. The provisions in SECURE 2.0 increases the RMD age to 73 for distributions made after December 31, 2022. This applies to individuals who turn 72 on or after January 1, 2023. Individuals who turn 72 in 2023 are not required to take an RMD for 2023. The law also has an age increase in 2033. At that point, the RMD age will be 75. In previous years, no RMD exception existed for Roth accounts under employer-sponsored retirement plans. SECURE 2.0 has changed that so, effective 2024, owners of all Roth accounts (Roth employer plans and Roth IRAs) will not have to take lifetime RMDs. 

Expansion of Qualified Charitable Distributions (QCD) – A QCD is a direct transfer of funds from your IRA to a qualified charity. The important nuance being that the amount of the QCD is then excluded from your taxable income. Importantly, these distributions can satisfy a portion or the entirety of your RMD up to $100,000. The biggest change here is that the $100,000 will now be indexed for inflation beginning in 2024. The starting age at which QCDs can be made has remained unchanged at 70½. This provision also has an expansion of the type of charity or charities that can receive a QCD. Starting this year, and separate from the $100,000 mentioned above, people age 70½+ can make a one-time $50,000 distribution to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity.   It is important to note that QCDs cannot be made to all charities, including donor-advised funds.

Retirement Savings Lost and Found Act – Most people will have many different jobs over the course of a career. As a result of job changes, there were nearly 25 million forgotten 401(k) accounts at the end of 2021.² In an attempt to reduce this statistic, SECURE 2.0 includes the Retirement Savings Lost and Found Act. This act creates a centralized, online-searchable database for Americans’ retirement plans at the Department of Labor (DOL). This is an easy way for citizens to locate and build upon former employee retirement savings. While not up and running just yet, the DOL must have this online-searchable database in place by December 29, 2024.

529 Plans – 529 plans are college savings vehicles that enable you to invest after-tax funds that will grow tax-deferred. Funds can then be withdrawn tax free if used for certain qualified education-based expenses. After SECURE 2.0 was signed into law, there is a new allowance that, after 15 years, assets within a 529 plan can be rolled over to a Roth IRA for the beneficiary, not the account owner. There is an aggregate lifetime limit of $35,000. These rollovers are still subject to annual Roth IRA contribution limits.

The intention of SECURE 2.0 is to encourage and incentivize Americans to strengthen their retirement prognosis. The increased opportunities to save, as outlined above, are an attempt to improve on what many deem a retirement crisis in our country. Not all provisions are mentioned in this article and everyone’s financial situation is different, so we encourage a direct discussion with your Sand Hill Wealth Manager to see how you are impacted by any or all of the items included in SECURE 2.0.

_{1 – Federal Reserve. “Economic Well-Being of U.S. Households in 2021”. May 2022
2 – www.bankrate.com/retirement/how-to-find-lost-401k/Forbes, Fidelity, Lord Abbett}