What You Need To Know About SECURE Act 2.0
The SECURE — Setting Every Community Up for Retirement Enhancement — Act was passed in 2019. After that, SECURE Act 2.0 was passed in December 2022 and went into effect Jan. 1, 2023.
The secondary SECURE Act establishes new rules regarding the timeline that individuals must adhere to with regard to taking RMDs from their retirement accounts. The SECURE Act 2.0 also reduces penalties attached to RMDs, among other things.
Important changes taxpayers need to know about
The SECURE Act increased the age at which taxpayers must start taking RMDs to 72. But with the passage of SECURE Act 2.0, the age increased to 73. In 2030, the age will increase to 74, and in 2033, it will be 75.
Before any legal changes went into effect, the penalty for failing to withdraw any RMDs was 50%, but the new laws have reduced the penalty by half, to 25%. Additionally, the penalty will be reduced to 10% for individual retirement account owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
Keep in mind that tax-related consequences can go into effect if an RMD is not taken in a timely manner, let alone ever. Also, other factors will influence RMDs over time, such as individuals no longer needing to withdraw RMDs from employer-related Roth accounts beginning this year.
In time, a Roth-associated emergency savings account can be added to a defined contribution retirement plan as well. Then, in 2025, catch-up contributions will increase for those who are at least 50 years old. In the same year, taxpayers aged 60 to 63 will be able to add $10,000 more to their accounts on an annual basis.
Please note that all catch-up contributions must be calculated on an after-tax basis, with the exception of catch-up contributions for people who earn no more than $145,000. And as inflation continues, these dollar values will likely be adjusted over time.
Furthermore, in 2025, employers will be permitted to auto-enroll eligible employees into a position where said employees receive a contribution between 3% and 10%. In other words, employees will have to actively opt out of this situation instead of having to opt in to begin with.
These exceptions pertain to businesses that employ no more than 10 workers as well as companies that have been in operation for fewer than three years. Also in 2025, portability services might roll out, allowing retirement plans to provide automatic transfers of certain retirement accounts to a new plan if and when an employee switches jobs.
Part-time employees who have worked for a company for two years and performed at least 500 hours of work are eligible to enroll in company retirement plans. Previously, three years of service were required.
Starting this year, employers may opt to make contributions to workplace savings plans on behalf of employees with student loan debt even if those employees do not make retirement plan contributions. Certain 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000.
The SECURE Act 2.0 expanded the exceptions to the current 10% penalty for early withdrawal from a retirement account. Also beginning this year, the maximum contribution amount for qualified charitable distributions will be allowed to increase based on the inflation rate.
In addition, beginning last year, taxpayers have a one-time opportunity to use a QCD to fund a Charitable Remainder Unit Trust, Charitable Remainder Annuity Trust or Charitable Gift Annuity up to $50,000. As with most legislation, the devil is in the details.
This is just a summary of the act’s complex provisions. To fully understand what affects you, and when, consult a tax professional before taking any action.
