The Secure 2.0 Act will have some nice outcomes for retirees moving forward. Most people do not think about how or when they will likely start using funds they have saved during their lives until they begin approaching the age of Social Security eligibility --and then again when they are forced to withdraw funds called Required Minimum Distributions, (RMDs) from their qualified accounts. They’ve been contributing towards these accounts during their working years. Many people have been fortunate recipients of company matches that have contributed toward a more robust nest egg. The outcome of the growth also means higher taxes on that harvest. But there is some good news.
The Secure 2.0 Act was one of many provisions included in the 1.7 trillion spending bill passed in December 2022 with the aim offering people more ways to save more money and defer taxes. This has some positives and some negatives. For instance,
The bigger the savings the better the portfolio looks on paper,
but the bigger the savings the more taxes have been deferred and will be required to pay the IRS upon withdrawal of those distributions.
(It’s important to pre-plan ways to eliminate paying excessive taxes
during a time when you have nearly zero deductions.)
But that is for another discussion. Let’s focus on all the positives for purposes of this article. The Act really benefits more than just 401(k) owners. If you are business owner, this act makes setting up retirement plans simpler and less expensive. Additionally, there are some big winners with this Act. Let’s break it down.
1. High net worth folks. This Act just raised the age for Required Minimum Distributions (RMDs) to move from age 72 to age 73 in 2023 and then to age 75 in 2033. What this means is higher net worth earners generally may not need these funds to live in retirement, and therefore they can let them “ride” longer earning interest accumulation along with assessing whether they should shift any money into alternative investments or tax-free growth investments. This also allows for a more robust legacy plan or charitable contribution opportunity.
This also allows time for the retiree to do Roth conversions moving money into tax-free growth that can be passed onto heirs who have 10 years to deplete the account.
2. Student loan borrowers. Starting in 2024, students who may have student loan payments would be able to treat the payments like retirement plan contributions. Additionally, employees making student loan contributions would be eligible for employer matches whether or not they make contributions themselves.
3. Parents saving for college. In 2024, parents contributing to 529 plans can have the funds rolled into a Roth IRA tax-free and penalty-free so long as the account has been in existence for 15 years. So, if your child opts for another route than college, he/she can still use this nest egg for the future other than academic without penalty. Note: one limitation is a $35,000 max funds for a lifetime on these rollovers.
4. Business owners. Offering nice retirement plans is one way business owners attract and keep good employees. Starting right now in 2023, as a business owner you could get up to 100% tax deduction on retirement plan start up costs.
“Furthermore, employers starting new plans in 2025 and thereafter will be required to automatically enroll eligible employees in their plans, setting aside at least 3%, but no more than 10%, of their paychecks.
Contributions would be increased by one percentage point each following year, until they reach at least 10% (but not more than 15%).” 1
Existing plans won’t have to use these rules and small businesses with 10 or less employers, small businesses in business less than three years and church and government entities won’t be subject to these rules either.
5. Older adults saving extra money for retirement. At age 50, you can currently put an extra $6500 into your retirement plan annually, but the age changes to 60-63 beginning in 2025 with a contribution of up to $10,000, and catch-up amounts would be adjusted for inflation. IRA contributions at age 50+ for $1000 will also be adjusted for inflation. The one catch is the income limit is set for $145,000 requiring catch-up contributions go into a Roth 401(k) beginning next year in 2024. This means one would pay income taxes on it before making the deposit.
Regardless of any negatives discussed here, there are many silver linings within this Act for retirees. If you want to explore your retirement strategies with one of our professionals, reach out to us at info@mvplwrc.com or contact us by phone at 775-365-9429. We do not charge anything to receive education or recommendations.