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SECURE Act 2.0

Dear Clients & Friends,


Once again, allow me to introduce our newest associate, Devin Rainone. Some

very important legislation, which affects almost every one of our clients, was

recently passed by Congress. Thus, I’ve invited Devin to prepare his very first

Weekend Reading. So, listen up! This affects all of you.


Devin, the floor is yours…

 

Despite how frustrating this year has been, the late hours of 2022 have

brought some good news to share. Days before Christmas, Congress passed its

Omnibus Bill for FY 2023 which is now headed to the White House for the

President to sign into law. Within this “brief” 4,000-page bill lies some major

reforms to the retirement planning landscape.


If anyone is looking for a good read, turn to page 2,046 for the long-awaited

SECURE 2.0 Act. This legislation builds off its sister bill, the SECURE Act of

2019, with the hope of enhancing the ability of Americans to save for

retirement. I’ve summarized some of the major highlights below.


Retirement Savings / Contributions:


IRA Catch-Up Limits: As it currently stands, IRA catch-up contributions for

individuals ages 50 and older are limited to $1,000, unadjusted for

inflation. After December 31, 2023, the catch-up contribution limit will be

adjusted for inflation.


Catch-Up Contribution Limits: Earlier this year, the IRS announced an increase

of the contribution limit for 401(k), 403(b), and most 457 plans, as well as the

federal government's TSP (Thrift Savings Plan). The limit will be raised from

$20,500 to $22,500. In addition, the catch-up contribution limit increased from

$6,500 to $7,500 for plan participants ages 50 and older.


Secure 2.0 also raised the catch-up contribution limit for individuals who are

ages 60 to 63. Starting in 2025, the limit will be raised to whichever is greater:

$10,000, or 50% more than the regular catch-up amount referred to

above. These limitations will be subject to inflation adjustments starting in

2025.


Finally, the bill mandated that all catch-up contributions will be subject to Roth

rules after calendar year 2023. This means that catch-up contributions will be

made with after-tax dollars. These contributions will not be tax deductible, but

can be withdrawn tax free. While the majority of our clients will likely benefit

from this change, we as a firm are not in favor of this mandate because Roth

contributions are not necessarily beneficial to all retirement plan

participants. We feel that this would be a terrific option to have, but to

mandate this kind of tax treatment is a bit over-reaching.


Automatic Enrollment: Starting at the end of 2023, 401(k) and 403(b) plans

will now be required to automatically enroll participants in their respective

plans when the participant becomes eligible. The automatic enrollment amount

cannot be less than 3% or more than 10% of the participants

compensation. This amount increases by 1% per year until it reaches a

minimum of 10% and is capped at 15%.


Small Incentives: Employers are no longer prohibited from offering small and

immediate incentives, such as gift cards, in exchange for employees making

elective deferrals. This goes into effect once the bill gets signed into law.


Qualifying Longevity Annuity Contracts (QLACs): Prior to the passage of

SECURE 2.0, QLACs were limited to the lesser of the following amounts:

$135,000, or 25% of your qualified retirement account balance. The new bill

removed the account value cap and increased the $125,000 limit to

$200,000.


Education:


529 meets Roth IRA: This provision of the bill allows for tax-free and penaltyfree

rollovers from 529 plans into Roth IRAs. This is HUGE! Beneficiaries of

529 college savings accounts would be allowed to roll over up to $35,000 over

their lifetime from any 529 account for which they are named as a beneficiary

into their Roth IRA. There are a few caveats: these rollovers would be subject

to annual Roth IRA contribution limits, and the 529 plan must have been open

for more than 15 years. Distributions made after December 31, 2023 can take

advantage of this new provision.


Student Loans: For plan years beginning after 2023, employers could help their

employees with student loans by making matching contribution payments to

an employee’s retirement plan. These matching payments would be based on

the employee’s student loan payments.


Types of Distributions:


Required Minimum Distributions: SECURE 2019 raised the RMD age from 70.5

to 72. SECURE 2.0 increases the RMD age to 73 beginning on January 1, 2023.

The age would be raised to 74 on January 1, 2030, and to 75 at the beginning

of 2033.


Penalties: The penalty for failing to take an RMD was reduced from 50% to

25%. However, if the failure to take an RMD from an IRA was corrected in a

timely manner, the excise tax would be reduced from 25% to 10%!


Domestic Abuse: After December 31, 2023, retirement plans will allow

participants who have self-certified that they have experienced domestic abuse

to withdraw the lesser of either $10,000 (adjusted for inflation) or 50% of the

account. This distribution would not be subject to the 10% penalty on early

distributions, and the participant would have the opportunity to repay the

withdrawn money over 3 years, and any taxes on said withdrawal would be

refunded.


Federal Disasters: In the case of a federally declared disaster, the new

mandate would allow up to $22,000 to be distributed from employer

retirement plans or IRAs. These distributions would not be subject to the 10%

tax on early distributions and could be repaid into a tax-preferred retirement

account. This would be effective for disasters occurring on or after January 26,

2021.


Long-Term Care Premiums: Individuals could withdraw up to $2,500 per year

from retirement plans to pay for premiums on certain long-term care

insurance contracts. These withdrawals would be exempt from the 10% tax on

early distributions. In order to be eligible for this provision, the policy must

provide high-quality coverage. This provision would go into effect 3 years after

the enactment of this legislation.


Emergencies: Up to $1,000 a year could be withdrawn for emergency

expenses. Only one distribution would be allowed per year, and a taxpayer

would have the option to repay the distribution within three years. Until the

distribution is repaid in full, no further emergency distributions would be

allowed. This provision would be effective for distributions made after

December 31, 2023.


Conclusion:


Other sections of the bill are aimed at aiding small businesses with setting up

and implementing retirement plans. There are also provisions enhancing

“savers” tax credits for individuals. The bill aims to amend rules related to

hardship distributions from qualified retirement plans (hardship distributions hit

a record high in October of 2022 for plans administered by Vanguard). Overall,

SECURE 2.0 has received praise as a comprehensive, bipartisan piece of

legislation that addresses the major issues our country faces with the

retirement planning landscape. As always, reach out if you have any questions

or thoughts on this new act.


Cheers to 2023!

Your MORWM “newbie,” Devin








*Data provided by FactSet

https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/vanguard-investor-pulse.html

https://images.thinkadvisor.com/contrib/content/uploads/documents/415/479719/GA_SECURE-2.0-Actof-

2022_Section-by-Section-Summary-FINAL.pdf

file:///C:/Users/Devin.Rainone/Downloads/Consolidated_Appropriations_Act_2023_Briefing.pdf

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