‘BLOCKBUSTER’ LEGISLATION:

SECURE 2.0 and its effect on your retirement

By Megan Kelto

Retirement planning options are becoming more flexible for individuals and employers alike, thanks to SECURE 2.0, which was signed into federal law at the end of last December.

Part of the Consolidated Appropriations Act of 2023, SECURE 2.0 is the sequel to the 2019 SECURE Act. It offers several notable provisions that will roll out over the next few years.

Whether retirement is just around the corner or a few decades off, SECURE 2.0 is a blockbuster, affecting everything from 529 college savings accounts, student loan payments, emergency savings accounts, 401(k) plans and more.

“I started my career in 1986, when 401(k) plans were still in their infancy. Now it’s the biggest single asset most Americans have,” said Robert Hughes, president and founder of Advantage Ben- efits Group. “And this is the biggest piece of legislation I’ve seen impacting plans in all those years.”

Headlining SECURE 2.0 are changes in required minimum distributions (RMDs). An RMD is money that must be withdrawn each year from an employer-sponsored retirement plan or IRA. Under SECURE 2.0, the age increased from 72 to 73 on January 1, 2023, and will increase again to 75 in 2033. It also cuts the penalty for failing to take an RMD in half – from 50% of the undistributed amount to 25%.

“To me, the biggest thing is when you have to start taking money out,” said Certified Financial Planner Debbie Craig of Raymond James and Craig Wealth Advisors. “Obviously, they’re trying to take some pressure off the Social Security system. They’re giving people some more flexibility, and they’re getting people less dependent on the Social Security piece of their retirement.”

By delaying when people must begin drawing down (and paying taxes on) their tax-deferred accounts, the legislation seeks to help people preserve their funds deeper into retirement – though the age at which people may begin withdrawing will remain at 59 and a half. Alternatively, and depending on their situation, a person may want to withdraw from their IRA accounts earlier and delay collecting Social Security as long as possible to get a larger monthly benefit.

Either way, for those on the cusp of retirement, “(i)t gives people more flexibility during those first 10 years or so, and how it makes sense for them to pull (the funds) out,” said Craig. “More flexibility is always a good thing.”

SECURE 2.0 also includes provisions designed to help those who are a little

(or a lot) farther out from retirement. Parents may be familiar with using 529 savings plans to give their children a head-start on paying for college, but SECURE 2.0 creates a new option to give children a head start on retirement.

Beginning in 2023, up to $35,000 can be rolled over from a 529 account into a Roth IRA for the beneficiary, where it can grow tax-free. This can be a good option for young adults who don’t pursue post-secondary education and for parents who want to protect those hard-won savings – until now, 529 funds that were not used for qualified education expenses were subject to taxes and penalties.

“It’s just a great incentive – we all know what has happened with college costs – and the ability to have more flexibility will hopefully get more people addressing the problem earlier, and getting that money socked away,” said Hughes.

There is some fine print of course, including that the 529 plan must be maintained for at least 15 years and the beneficiary has to have earned income. Talking with a financial advisor about specific 529 plan strategies is a smart move.

On the employer side, SECURE 2.0 introduces a number of rule changes and new benefits employers may opt to offer their workforce.

“We’ve been in this talent war for the last few years – obviously there’s no shortage of that in Traverse City. Employers have been looking to add above-andbeyond benefits beyond the traditional retirement plans,” said Hughes.

One such benefit is an Emergency Savings Account, or ESA. Beginning in 2024, employers may give employees the option to keep a $2,500 ESA within their retirement plan to help with life’s unexpected events.

“The employee can put in after-tax contributions – unless they’re a highly compensated employee – and have access to it in an emergency, and get the employer match. And it’s something they can access without jumping through hoops or incurring a penalty,” said Hughes.

Hughes has also talked to a number of area employers who are looking for ways to help workers with student loans. Beginning in 2024, SECURE 2.0 will offer such a tool to employers.

“If I’m a new employee and I can’t afford to contribute to my 401(k) plan because I’m paying my student loans, my employer would be able to match based on my student loan payments, not money I’m actually putting into my retirement plan,” explained Hughes.

“So, it’s a contribution that goes into the retirement plan and it helps the employee that can’t afford to put money into the retirement.”

According to Craig, another important change deals with SIMPLE IRAs – a type of retirement account designed for small businesses. Employers now have the option to offer a Roth component within their SIMPLE plans.

“We do a lot of SIMPLE IRAs for small businesses under 100 (employees), because 401(k)s cost a lot for administration. So, if you have a business with five people, that’s really hard. I think the Roth SIMPLE will be nice for smaller businesses up north,” said Craig.

Like all Roth accounts, Roth contributions in a SIMPLE IRA are made with after-tax dollars but are taken out in retirement tax-free.

One of the goals of SECURE 2.0 is to encourage people to participate in their employer’s retirement plans. Starting in 2025, companies with new 401(k) and 403(b) plans will be required to automatically enroll employees.

“They are giving the employer more

“We do a lot of SIMPLE IRAs for small businesses under 100 (employees), because 401(k)s cost a lot for administration. So, if you have a business with five people, that’s really hard. I think the Roth SIMPLE will be nice for smaller businesses up north.”

– Debbie Craig, certified financial planner, Raymond James and Craig Wealth Advisors responsibility around helping employees. Most of the employers really want to help employees retire, and the business owners I work with are really encouraging their employees to participate,” said Craig.

Hughes concurs.

“It’s all about communication and bringing this to the average person,” he said. “People are leaving free money on the table.”

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