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Understanding the SECURE 2.0 Act

N Bowes 2014
Nancy E. Bowes, CFP®
Vice President, Wealth Advisor
[email protected]
(585) 419-0670 x50673

The original “SECURE” Act was approved into law in 2019. SECURE stands for Setting Every Community Up for Retirement Enhancement. It was aimed at preventing Americans from outliving their savings. SECURE 2.0 Act was enacted in December 2022 to finish the job by helping workers save more money for retirement and leave their savings untouched and untaxed for longer. Here are a few highlights you should be aware of.

Required Minimum Distributions (RMDs) are pushed back again

The age that retirees must begin taking taxable distributions from their traditional IRAs raises from 72 to 73 starting in 2023. If you turn 72 this year, you will not be required to start your RMD until 2024. The RMD age will change from 73 to 75 in 2033.

Reduced penalty for not taking your Required Minimum Distribution

Another favorable change to the rules starting this year, the excise tax for NOT taking your RMD drops from 50% to 25% of the RMD amount, but if corrected in a timely manner (sometime during the following tax year) the tax drops to only 10%.

The cap on annuity contracts held inside the IRA has been raised

The cap on Qualified Longevity Annuity Contracts (QLACs) has been raised from $125,000 to $200,000, and the 25% limit is eliminated. A QLAC is simply an annuity contract purchased with IRA (or other retirement plan) funds to create a fixed monthly income payment from your retirement account which can begin as late as age 85. This is one option to consider if you are looking to create a monthly “paycheck” to supplement your social security. Under the SECURE 2.0 Act, retirees can now combine the payments from both the QLAC and the IRA for the purpose of calculating their RMD. Previously they had to be separated, each with its own RMD which sometimes resulted in higher total RMD payments than if they were combined.

The act provides another option for inheriting an IRA from a deceased spouse

Starting in 2024, a husband or wife can use the deceased spouse’s age for RMD calculations and use the more favorable Uniform Lifetime table to stretch RMDs over his/her lifetime. If the surviving husband or wife dies before RMDs begin, the beneficiaries (most often their children) can stretch RMDs over their lifetime instead of being stuck with the 10-year rule. This is quite lucrative in a situation where the deceased spouse was younger, had a sizeable IRA, and the surviving husband or wife remarries.

Ability to roll 529 funds into a Roth

If you have a 529 account where there is money left over that won’t be used for a family member’s college expenses, you may be facing a sizeable tax bill if you are planning to cash it out to repurpose the money. Fortunately, account beneficiaries will now be able to directly roll over up to $35,000 to Roth IRAs provided the 529 has been open for at least 15 years. The beneficiary must have earned income and rollover is subject to annual contribution limits, $6,500 in 2023. Any money contributed to the 529 within the last 5 years is not eligible to be rolled over to the Roth.

Employers can match student loan payments

If you have student loans to be repaid, your employer can now help you directly. Starting 2024, the employer can match an employee’s student loan payment with a contribution to the employee's 401(k) plan. This could be an inducement for potential employees with large student loan debt to join a company.

Automatic enrollment for retirement plans

Beginning in 2025, the Act requires most new employer-sponsored plans to automatically enroll employees with contribution levels between 3% and 10% of income, and automatically increase their savings rates by 1% each year until they reach at least 1% - 15% (max) of employees earned income. Workers will be able to opt out of the programs.

There are over 90 provisions in the Act including allowances for families to access retirement funds in case of emergencies, increasing the “Catch-up” contributions for workers over 50, and providing more flexibility to make higher charitable donations from your IRA to name a few. The items listed above are not all inclusive, but they are the ones that will most likely affect you and your family so it’s good to be aware.

With recent tax law changes, this is a good time to evaluate your plan for Retirement Savings. As always, our team at CNB Wealth Management would be happy to help guide you through the process and answer any questions you have.

©2023 Broadridge Investor Communication Solutions, Inc. All rights reserved. This material provided by Nancy E. Bowes.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.