Cypress Wealth Services
February 2023
With the new year has come a new federal law that makes it easier for retirement plan participants to save—and save more—and also for plan sponsors to offer plans and enroll participants.
The SECURE Act 2.0, a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, brings largely good news. The revised bill is aimed at expanding retirement plan coverage, increasing retirement plan savings, and simplifying the plan’s current rules.
To help clarify these changes, our team at Cypress Wealth Services has created this guide to help you know more about Secure 2.0 and how its provisions could impact your retirement plan moving forward.
Perhaps the most significant change in SECURE 2.0 is the update to required minimum distributions. Under the original SECURE Act, the RMD age was increased from 70½ to 72 for taxpayers who have a traditional IRA or other qualified retirement accounts. With the new legislation, however, the RMD age has been increased to 73 for those born between 1951 and 1959. The RMD age will increase again in 2033 to age 75 for those born in 1960 or later. This can provide some much-needed tax relief for retirees who don’t necessarily need to withdraw funds at that age to pay for retirement expenses. It also allows those accounts to stay invested for longer, which can provide a boost to overall retirement savings.
Another notable change to the RMD rules includes a decrease to the steep 50% penalty for missed or late distributions. Starting in 2023, the penalty will drop to 25% of the missed RMD. Additionally, IRA owners will have the ability to reduce this penalty further (to 10%) if they take the RMD and file an amended tax return in a timely fashion.
SECURE 2.0 also changes the rules around RMDs for Roth contributions in employer-sponsored retirement accounts. Starting in 2024, Roth accounts will no longer be subject to the RMD requirement. The act also expands Roth eligibility to SIMPLE and SEP IRAs starting in 2023.
The SECURE 2.0 Act provides greater opportunities for retirement savings by increasing catch-up contributions. The most important changes include:
- IRA Catch-Up Contributions Indexed to Inflation: While the base contribution limit to IRAs ($6,500 in 2023) is indexed annually based on inflation, the catch-up amount ($1,000 in 2023) has traditionally been fixed. Starting in 2025, IRA catch-up contributions will be linked to inflation, allowing the contribution limit to increase as the cost-of-living increases.
- “Special” Catch-Up Contributions for Employees Age 60 to 63: The SECURE 2.0 Act increases catch-up contributions for employees aged 60 to 63 starting in 2025. As of age 50, retirement plan participants are able to make catch-up contributions up to $7,500 for 2023. The new law increases this amount to $10,000 (indexed to inflation) once you reach age 60.
- Catch-Up Contributions Required for Those With Wages Above $145,000: Starting in 2024, employees with wages above $145,000 will be required to make any catch-up contributions to a Roth account, effectively eliminating the current-year deductibility of those contributions.
- Increased Catch-Up Contributions for SIMPLE Plans: In 2024, the catch-up contribution limit for SIMPLE plans (IRA and 401(k)) will increase by 10%. In 2025, the catch-up contributions will be increased to $5,000 (indexed to inflation) for employees aged 60 to 63.
3. 529 Rollovers
Many Americans save for college education through 529 accounts, which allow up to $17,000 in gift-tax-free contributions per year, or $85,000 if the lump-sum election is selected. Contributions grow tax-free as long as they are used for eligible education expenses. If they are used for an unqualified expense, the earnings are taxable and the distribution is subject to a 10% penalty.
This is where rollovers come in. The new SECURE 2.0 provisions allow unused 529 funds to be rolled over into a Roth IRA starting in 2024. There are some strict limitations to this new rule, including:
- There is a lifetime rollover cap of $35,000.
- Rollovers are still subject to the annual Roth contribution limit ($6,500 in 2023), so it may take multiple years to completely roll over the funds.
- The rollover must be made to the 529 beneficiary’s Roth account (typically the student), not the 529 account holder’s Roth (typically the parent).
- The 529 must have been open for at least 15 years.
- Contributions and earnings made in the last 5 years cannot be rolled over.
The SECURE 2.0 is a wide-ranging law that covers many additional aspects of retirement readiness and overall financial health to help taxpayers better prepare for the future.
As part of this goal, the act expands and creates new opportunities for retirement savings. For instance, employers will now be able to offer employees the choice to receive matching contributions on a Roth or pre-tax basis. Previously matching contributions were always considered pre-tax. If Roth contributions are selected, they will be considered fully vested upon contribution. Though this might take some time for employers and payroll companies to implement, this option will allow employees to choose whether their matching contributions are taxed up front (Roth) or in retirement (traditional).
Employers will also be required to automatically enroll eligible employees in workplace retirement plans at a minimum 3% contribution rate starting in 2025. Retirement accounts will also be automatically portable, meaning account balances will immediately transfer to your new employer’s retirement account if you leave your current job.
Additionally, defined contribution plans will start offering emergency savings Roth accounts for non-highly compensated employees starting in 2024. Contributions are limited to $2,500 per year, but the first four withdrawals per year would not be subject to taxes or penalties.
Also in 2024, employers will be able to match an employee’s student loan payments by contributing a matching amount to their retirement account. This provision provides an extra incentive for student loan borrowers to make payments on their loans, while also helping them save for retirement.
The SECURE 2.0 Act of 2022 is an important piece of legislation that provides more options to save for retirement. We understand that it can be difficult to understand the intricacies of the new rules, which is why we’re here to help.
At Cypress Wealth Services, our goal is to make retirement planning as simple as possible. We’re here to offer guidance on how the new savings opportunities available in the SECURE 2.0 Act of 2022 apply to your personal plan and goals. If you have any questions, don’t hesitate to reach out by calling us at 866.888.6563 or contact one of our offices today. We look forward to helping you retire to a life you love.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high-net-worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their experience and expertise to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in Palm Desert, CA, Tustin, CA, Athens, GA, and Anchorage, AK, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.
