From the worst bond market crash since 1949 to a crypto bust that may be leading to the biggest financial fraud in history, investors were tested, to say the least, in the year 2022. Those investors that made it through, though, did so by focusing on investment risk management and by making responsible decisions within investment portfolios…As we have mentioned in several prior posts, at Capstone, we made early adjustments ahead of the year in order to observe caution in client portfolios while remaining vigilant in mitigating “downside capture” as the stock and bond markets swooned throughout 2022.
Capstone’s advisors are hopeful for a calmer 2023 and for the storm clouds to clear – but we remain guarded while maintaining our focus on market valuations and active risk management.
2022 brought more than just crazy volatility and distressed markets though…It also had its fair share of new legislation and new rules that will likely impact almost every investor now and several years going forward. One law, known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was created in 2019 was amended, finalized, and ultimately passed in 2022.
This final version of the Act, known as SECURE 2.0, has over 100 provisions (some small, some big) that are changing the game for retirement planners and investors alike and I thought it would be timely to divulge details within four major segments of the bill in today’s post.
Let’s dig in…
New Required Minimum Distribution (“RMD”) Rules
The age for RMDs in 2023 is now 73: By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). For those turning 72 in 2023, you may now delay the start of your required minimum distributions to age 73. Ten years from now, in 2033, RMDs will be delayed until IRA owners turn age 75. If your 72nd birthday occurred before December 31, 2022, you must continue taking distributions as is, but if you are turning 72 in ’23 and have already planned to take your RMD this year, you may now need to rethink the timing of that withdrawal and all tax circumstances that would accompany the RMD.1
Reduced penalty: Up until this new legislation, the penalty for missing an RMD was a punishing 50%. Under the new law though, the penalty halved and is now down to 25%...Also, if you fix the mistake quickly, the penalty can be as low as 10%.2
New Accumulation Rules
Catch-Up Contributions: Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually.3
Automatic Enrollment: Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically, although employers must also offer employees the ability to opt-out of enrollment in advance.4
Student Loan Matching: In 2024, companies can match employee student loan payments with retirement plan contributions. This will be an optional feature which will allow employers to add the provision to preexisting (or new) retirement plans to help provide workers with an extra incentive to save for retirement while paying off student loans.5
Revised Roth Rules
529 to a Roth: Starting in 2024, subject to certain conditions, individuals can roll a 529 education savings plan account into a Roth IRA. So if your child gets a scholarship, goes to a less expensive school, or doesn't go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit, distributions must meet a five-year holding requirement, and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax and penalty-free withdrawals are allowed under other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.6
SIMPLE and SEP: From 2023 and onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees (“SIMPLE”) or Simplified Employee Pensions (“SEP”) IRAs.7
Roth 401(k)s and Roth 403(b)s: The new legislation aligns the rules for Roth 401(k)s and 403(b)s with Roth Individual Retirement Account (IRA) rules. Beginning in 2024, the legislation no longer requires minimum distributions from Roth 401(k) Plans and other Roth employer-sponsored Plan accounts.8
Support for Small Businesses: In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.9
Qualified Charitable Donations (QCD): From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is 70½ years old and older can make a QCD as long as it remains under the limit.10Access to funds: Plan participants will now be able to use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can access up to $1,000 from a retirement account for personal or family emergencies.11
Just because retirement rules have changed it does not mean that adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changing another.
Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same forever. This article intends to give you a broad overview of SECURE 2.0, however, it is not a substitute for individualized financial or income tax planning and advice. If you have questions about this new legislation or how SECURE 2.0 might may affect your overall financial plan, please contact us at (570)-587-7800 or (888)-587-7526 (Toll Free) and one of our advisors will be glad to assist.
1. Fidelity.com, December 23, 2022
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
SECURE Act 2.0: An Overview
January 31, 2023