5 Key Impacts Of Secure 2.0

By Chris McGee & Brady Franklin
Endeavor Private Wealth

According to a study conducted by the National Institute on Retirement Security (NIRS), nearly 40 million working-age households in the United States have no retirement savings at all. This represents a staggering 45% of the U.S. population, and it includes both those who have no access to an employer-sponsored retirement plan and those who do, but have not yet started saving for retirement. According to the ASPPA, 74% of small businesses do not offer an employer sponsored retirement plan

There is a history of bipartisan support for addressing the retirement crisis in America. In December of 2022, the Secure a Strong Retirement Act of 2022, otherwise known as the Secure 2.0 Act, was signed into law. The $1.7 trillion tax bill was designed to encourage Americans to invest more and for longer.

Secure 2.0 is nearly 400 pages long and has nearly 100 provisions. We want to provide five key implications for individuals and business.

1. A promising development is that investors will be able to save more for longer.

• The required minimum distribution (RMD) age is being increased.

  • Secure 2.0 raised the RMD age to 73.

  • The RMD age will increase again to 75 by 2033.

• Catch up contributions have increased.

  • Individuals 50 or older now have a catch-up contribution limit of $7,500 for Individual Retirement Accounts (IRA) for a total of $30,000 and will be adjusted for inflation starting in 2024.

  • In 2025, employees 60 to 62 years of age will have an increase of 50% more than the regular catch-up contribution (or $10,000, whichever is greater) in retirement accounts.

• Roth treatment is available for vested employer contributions. Employers can elect for employees to have the option for employer contributions - both matching and non-elective, to be made to employee’s Roth 401(k) and 403(b) retirement plans.

• Starting in 2024, investors will no longer be required to take RMDs from Roth 401(k)s or 403(b)s.

• All individuals who earn $145,000 or more will be required to make all catch-up contributions on an after-tax basis, though regular contributions can still be made on a pre-tax basis.

• Small business owners can now offer Roth versions of SIMPLE and SEP IRAs in addition to the traditional SIMPLE and SEP IRAs.

As a small business, we know firsthand both the financial and administrative challenge of offering a 401(k). We see it as something with significant value both as a benefit and recruiting tool in a tight labor market.

2. Secure 2.0 significantly expanded tax credits for employer sponsored retirement plans.

• Employers can claim up to $5,000 for three years for the costs of setting up a qualified plan with an additional $500 for utilizing auto enrollment.

• A new credit was introduced that reimburses small businesses for up to $1,000 of employer contributions on behalf of modest earners and phased out over five years.

  • A hypothetical business with 44 employees could potentially see as much as $154,000 in tax credits over the course of five years to offset the costs of a retirement plan start up.

We believe in the value of saving for education for our own kids as well as kids of clients. A question we get asked often when thinking about saving for college in a 529 is what if a 529 is overfunded?

3. Secure 2.0 allows a 529 to Roth rollover option starting in 2024.

• The 529 account must be at least 15 years old with the same beneficiary.

• The rollover amount must have been in the account for at least five years.

• Roth IRA annual contribution limits will apply to rollover contributions ($6500 in 2023).

• 529 to Roth rollovers are limited to $35,000 per beneficiary over their lifetime.

4. Secure 2.0 has expanded Qualified Charitable Distributions (QCD) which are one of the most tax-efficient ways to accomplish charitable giving. QCDs allow investors to give gifts to charities on a pre-tax basis.

• Individual investors can currently make $100,000 of QCDs annually starting at age 70½.

• The $100,000 QCD limit will be indexed for inflation starting in 2024.

• Starting in 2023, investors can use QCDs to fund charitable remainder trusts and charitable gift annuities.

5. There is a lot that is NOT in Secure 2.0...

• There is not a restriction on conversions from a traditional IRA/qualified plan to Roth IRA/qualified plan.

• There is not a limit on backdoor Roth IRA conversions.

• The Qualified Charitable Distribution age has not changed from 70½.

• The types of investments have not changed that can be purchased with retirement funds.

• The “10-year rule” for distribution inherited IRAs introduced under the original SECURE Act has not changed.

The changes in Secure 2.0 have significant implications for investors and businesses. For investors, it is easier to save more money, for longer and with more Roth (after tax) options. 529s are more flexible by allowing Roth rollovers. Charitably inclined investors will be able to give more and with more vehicles. Businesses have more tax incentives than ever to sponsor retirement plans for their employees.

TK