SECURE 2.0 CAN HELP YOU SAVE FOR RETIREMENT

At the end of last year, the SECURE Act 2.0 was passed. This legislation builds on the sweeping Setting Every Community Up for Retirement Enhancement Act passed in 2019. Unlike many movies where the sequel can be a disappointment, n RMD CHANGES: The 2019 SECURE Act raised the age at which retirement savers must begin taking taxable distributions from their traditional IRAs and most work-based retirement accounts from age 70 ½ to 72. These distributions are also known as Required Minimum Distributions, or RMDs. SECURE 2.0 raises that age again to 73 beginning in 2023 (for those who reach age 72 after Dec. 31, 2022) and to 75 in 2033. This change can allow tax-deferred retirement savings the opportunity to grow longer and the account holder the potential to have greater control over taxable income during that time. n EXPANDED QCDS: Many of our clients are charitably inclined and are happy to hear the amount eligible for a qualified charitable distribution (QCD) from an IRA will be indexed for inflation starting in 2024. Currently, the maximum QCD allowed per annum is $100,000. A QCD can be transferred from the individual’s IRA directly to a qualified charity and the distribution is excluded from Adjusted Gross Income (AGI). to make up for lost time by saving more for retirement! SECURE 2.0 allows for an additional catch-up contribution of $1,000 to their IRA. Starting in 2024, this amount will be indexed annually for inflation, similar to employer plan catchup contributions (limited to $7,500 in 2023). Also, starting in 2025, the catchup contribution for people aged 60 to 63 will increase to a minimum of $10,000 for 401(k)s and similar workplace plans ($5,000 for SIMPLE plans). However, beginning in 2024, SECURE 2.0 requires that all catch-up contributions for workers with incomes above $145,000 will be required to be after-tax (Roth) contributions. n NEW EARLY-WITHDRAWAL n INCREASED CATCH-UP CONTRIBUTIONS: Good news for earners aged 50 and over who are trying

SECURE 2.0 delivered on many fronts, including by allowing many workers to save more money for retirement while at the same time letting some retirees leave their savings untouched and untaxed for longer. Let’s take a high-level, quick look at these enhancements.

In addition, beginning in 2023 investors will be able to make a one-time charitable distribution of up to $50,000 from an IRA to a charitable remainder annuity trust (CRAT), charitable remainder unitrust (CRUT), or charitable gift annuity (CGA). Not all charitable organizations are able to use all possible gifts, so it is prudent to check first. The type of organization selected can also affect the tax benefits the donor receives. Furthermore, to qualify the distribution cannot be added to an existing CRAT, CRUT or CGA but must fund a new one.

One of our team’s core lines of business is serving as the adviser on employersponsored retirement plans for privately held businesses. As of the time of this article, many plan providers are scrambling to put systems in place to be able to accommodate the SECURE Act 2.0’s requirement that highly compensated employees’ catch-up contributions must be in the form of Roth contributions. We will see how the industry will adapt to this mandate.

Any opinions are those of Tom McCartney and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider.

PENALTY EXCEPTIONS:

Distributions from traditional, pre-tax retirement savings accounts are generally subject to ordinary income tax. In addition, distributions prior to age 59½ also may be subject to an early-withdrawal penalty of 10%, unless an exception (such as death or disability) applies. SECURE 2.0 allows for several new exceptions to the early-withdrawal penalty, including an emergency personal expense, terminal illness, domestic abuse, to pay long-term care insurance premiums, and to recover from a federally declared disaster. Amounts, rules and effective dates differ for each circumstance, with some exceptions effective immediately. n SPECIAL NOTE IF YOU ARE AN EMPLOYER! Beginning in 2025, the Act requires most new employersponsored plans like 401(k)s to automatically enroll employees with contribution levels between 3% and 10% of income, and to automatically increase their savings rates by 1% each year until they reach at least 10% (but not more than 15%) of income. Although your employees will be able to opt out of the programs, you will need to make sure your plan’s adoption agreement is properly updated and that your employees receive proper notice of these plan parameters.

In addition, SECURE 2.0 permits employer matches to be made to Roth accounts. Currently, employer matches can only go into an employee’s pre-tax (traditional) account. This provision takes effect immediately; however, it may take time for employers to amend their plans to include this feature.

Beginning in 2024, the legislation permits employers to automatically enroll non-highly compensated employees into emergency savings accounts where they can set aside up to $2,500 (or a lower amount that an employer stipulates) in a Roth-type account. Employers may also help workers who are making qualified student loan repayments to simultaneously save for retirement by investing matching contributions in a retirement account in their name. With student loan debt having become an increasing burden for many, this aspect of the new law would allow an employee to both pay down their student debt and save for their retirement. n TRANSFER OF EXCESS 529 FUNDS TO A ROTH IRA: A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary. Our team typically sees a parent or grandparent funding this type of account as it can be a tax-advantaged way to help save and pay for qualified education expenses. In cases where the 529 has been overfunded and the account owner would like to make withdrawals that will not be used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly an additional 10% tax penalty. n THE SEQUEL IS BETTER! In my opinion, SECURE Act 2.0 is better than the original SECURE Act of 2019. It is also complex with many moving parts. To learn more about how you may benefit from this new law, we strongly encourage you to consult your financial adviser and your tax counsel. Of course, our team would welcome your call as well!

Fortunately, starting in 2024, account beneficiaries will be able to directly roll over up to $35,000 from 529 plan accounts to Roth IRAs, provided the 529 accounts were open for at least 15 years. The rollover amounts would be subject to Roth IRA annual contribution limits ($6,500 in 2023 and indexed for inflation thereafter). Distributions from the Roth IRA should be tax-free and penalty-free as long as the fiveyear holding requirement has been met, and they are taken after age 59½ (or an exception applies).

Tom