Planning for retirement just got a major upgrade! With the Secure Act 2.0 signed into law in December 2022, new opportunities are now available to boost your savings and plan for the future with more flexibility than ever. This legislation brings several impactful changes, helping individuals enhance their retirement savings, manage withdrawals, and explore new planning strategies. In this post, we’ll break down some of the key elements of the Secure Act 2.0 and explain how it affects your savings options, emergency funds, and estate planning, including the use of See-Through Trusts.
Here are some of the most significant changes introduced by the Secure Act 2.0:
- Catch-up Contributions: If you are 50 or older, you can contribute more to your 401(k) and IRA to help strengthen your retirement savings as you near retirement. Originally set to take effect in 2025, IRS Notice 2023-62 has delayed the effective date for high-income earners to contribute catch-up amounts to Roth accounts until the end of 2025, making this rule effective in 2026. This provision will apply to individuals earning over $145,000 further boosting tax-free savings.
- Increased Flexibility with Required Minimum Distributions (RMDs): The Secure Act 2.0 raises the age when RMDs must begin from 72 to 73 starting in 2023, with a further increase to age 75 by 2033. This change gives individuals more time to allow their retirement savings to grow before they are required to take distributions.
- Automatic 401(k) Enrollment: Beginning in 2025, new 401(k) plans established after December 29, 2022 will be required to automatically enroll eligible employees at a minimum contribution rate of 3%, helping more people save for retirement without needing to take action. Employees will have the option to opt-out if desired.
- Emergency Distributions: The Act allows penalty-free withdrawals of up to $1,000 per year from a 401(k) for emergencies. No further emergency withdrawals are allowed until one of the following occurs: a) the prior distribution is repaid, b) employee contributions to the plan since the distribution equal at least the amount of the distribution, or c) three years have passed since the distribution. This change aims to provide more flexibility for individuals facing financial hardships.
- Qualified Disaster Recovery distributions: individuals affected by federally declared disasters can withdraw up to $22,000 from their retirement accounts without facing the 10% early withdrawal penalty, even if they are under the age of 59½. Similar to the COVID-19 distribution rules these permanent disaster recovery rules allow taxpayers to elect to spread the distribution into income over three years. All or a portion of the distribution may be repaid within three years of the time it is received, helping to mitigate the tax impact and preserve retirement savings.
- 529 Plan to Roth IRA Conversions: One of the most exciting changes is the ability to convert up to $35,000 from a 529 plan to a Roth IRA tax- and penalty-free. However, the 529 plan must have been open for at least 15 years to qualify for this conversion, making it a useful strategy for long-term savers.
Considering these changes, many individuals are also revisiting their estate planning strategies. A popular tool in this space is the See-Through Trust, which ensures that retirement assets are distributed according to your specific wishes while maintaining compliance with the new rules introduced by the Secure Act.
A See-Through Trust allows retirement assets, such as IRAs, to be distributed to beneficiaries through the trust rather than directly to individuals. After the trust owner passes away, the retirement account distributes funds to the trust. The trust, in turn, passes the assets on to the beneficiaries according to the terms outlined in the trust agreement.
One important aspect to note under the Secure Act is that in many cases an inherited IRA must now be distributed within 10 years of the original owner’s passing.
Navigating the new rules and opportunities presented by the Secure Act 2.0 can be complex, but with the right planning, you can maximize your retirement savings and ensure that your estate is handled according to your wishes. Whether you are considering Roth conversions, exploring emergency fund options, or planning your legacy with a See-Through Trust, having the right strategy in place is essential.
If you have questions about how the Secure Act 2.0 affects your retirement or estate planning, we are here to help. Contact us today to explore the best strategies tailored to your unique financial goals.
