The Biggest Retirement Legislation in Our Lifetimes

BY PAM KRUEGER

Last year’s combination of inflation, economic uncertainty, tanking stock, and bond markets threw a wrench into millions of Americans’ retirement plans. Fortunately, the omnibus spending bill passed by Congress and signed by President Biden at the end of 2022 includes a list of more than 90 provisions bundled under the Securing a Strong Retirement Act of 2022, otherwise known as SECURE 2.0.

The new Act, an upgrade of the original SECURE Act of 2019, will revolutionize how millions of Americans of all ages and income levels save and plan for retirement. But savers aren’t the only ones who will benefit from this valuable package of incentives. If you’re retired, SECURE 2.0 also offers attractive features that may help you shield money you take out of your IRA and 401(k) plan accounts from taxes, both now and later.

How will SECURE 2.0 affect you personally? That depends on many factors, and you may want to meet with a fee-only fiduciary financial advisor who’s up to speed on all these changes before you take advantage of them. If you or your adult children are struggling to pay off student loans and build a retirement nest egg at the same time, these new retirement rules will help. One game-changing perk will let some college graduates shift leftover money earmarked for education to their Roth IRA. For now, let’s take a closer look at a few critical retirement-related situations where SECURE 2.0’s key features offer the biggest bang for the benefit buck.

Goldman Sachs research shows that 49 percent of women said they weren’t saving enough for retirement, compared to 35 percent of men. This makes sense, even if it’s not fair. After all, many women took a break from their careers to care for their children, particularly during COVID-19. During these lost years, they missed out on making their own contributions, receiving employer matching and profit-sharing contributions, and the compounding benefits of a stock market that posted positive returns in 14 of the past 22 years–including 11 where returns exceeded 10 percent.

Fortunately, the IRS raised the maximum 401(k) and IRA contribution limits over the past few years. SECURE 2.0 will let you save even more, especially if you’re over 50 and can afford to make significant contributions. In 2023, you can make regular contributions of $22,500, plus up to $6,500 in additional catch-up contributions to your 401(k) plan. Additionally, IRA investors can contribute up to $6,500 plus $1,000 more in catch-ups. Starting in 2024, IRA catch-ups, which haven’t changed since 2006, will now adjust annually for inflation.

You’ll get the biggest catchup benefits if you’re age 60, 61, 62 or 63 in 2025 and still making 401(k) contributions. During those “super-saver” years, you can turbo-charge your catch-up contributions, up to $10,000 or 150 percent of whatever the standard catchup contribution limit was the year before—whichever is higher.

IF YOU’RE HIGHLY PAID, THERE’S A BIG CATCH.

Starting in 2024, if you’re making more than $145,000 per year, SECURE 2.0 will require all of your 401(k) catch-up contributions to be after-tax Roth contributions. (Note: These same rules apply to Roth accounts in 403(b) and 457(b) plans.)

The good news? This income threshold only applies to W-2 income you earn from your current employer. Any money you earn from freelance or gig work doesn’t count. This new rule softens the blow by giving you a couple of perks: n All Roth 401(k) withdrawals are tax-free, even if you roll them over into a Roth IRA. n Starting this year, you can choose to have some or all of your employer’s matching or profit-sharing contributions made as after-tax Roth contributions. n Starting in 2024, you’ll never have to take the Required Minimum Distribution (RMDs) from your Roth 401(k) accounts while you’re alive.

If you—or your children—are done with college and haven’t withdrawn all the money in your 529 College Savings Plan account, you may be able to roll over up to a lifetime total of $35,000 tax-andpenalty-free to a Roth IRA starting in 2024.

However, certain conditions must be met. First, the 529 plan must have been established for at least 15 years before the rollover can occur. Then, you (or your children) must be the authorized beneficiary of the 529 plan you intend to roll over and the account owner of the Roth IRA. The amount you roll over each year counts toward your annual Roth IRA contribution and can’t exceed the yearly limit for that year. And finally, you can’t roll over contributions you’ve made (or any earnings) over the five years preceding a rollover.

There are still many gray areas surrounding this provision, so it’s essential to consult with a tax professional before you take advantage of this unique opportunity.

Suppose you’re a small business owner struggling to attract and retain critical employees. In that case, it will be easier and less expensive to offer the one essential benefit that all workers should have these days: Access to a highquality, flexible 401(k) or other defined contribution plan.

Workers need and want these plans. According to research from Bankrate, one-third of all Americans have never had a retirement account. And less than one-third say that their retirement savings plan is on track.

Furthermore, according to research from WTW, 44 percent of job seekers say they’re more likely to join a company with a top-notch retirement plan over one offering better pay.

Maybe you’ve been putting off offering a 401(k) plan to your employees because of costs and administrative burdens. If so, SECURE 2.0 has some great news for you if you’re starting a new plan: n Starting this year, you could get a tax credit of up to 100 percent of qualified plan startup costs. n You may also be eligible for an additional tax credit of up to $1,000 per employee based on the amount your company contributes to their accounts. As a business owner, these new provisions will ease administrative burdens and reduce paperwork. n To help you encourage your employees to save, SECURE 2.0 will require any 401(k) plan you establish in 2025 or later to automatically enroll eligible employees with a starting contribution of 3 percent that will automatically go up each year. (They can choose to opt-out at any time). n If your employees are struggling with college debt, starting in 2025, you can make additional contributions to their retirement accounts that match their monthly student loan payments.

If your business already offers a 401(k) plan, some of the “startup plan” provisions won’t apply. And you’ll need to update your plan to incorporate some of these new SECURE-enabled features.

As we’ve seen, many of these provisions are fantastic for people trying to sock away more money. And if you’re confident in your plan, that’s a big accomplishment. If you’re retired—or will be soon—and you’ve made more than enough money to live the way you want to during your golden years, what’s in it for you?

Your main concern may be to limit the tax impact of retirement withdrawals and keep more of your nest egg growing over time. Fortunately, for many seniors, SECURE 2.0 delivers.

If you’re turning 72 this year, you won’t have to start taking RMDs from your retirement accounts as you had to in previous years. Starting in 2023, the new rule raises this age to 73, which means you can wait until next year to take your first RMD. Late-stage boomers, Gen-Xers, and beyond have an even better deal because in 2033 the starting RMD age will go up to 75.

If you’re over age 59½ or need to start taking RMDs soon, you may want to take advantage of a couple of strategies that could lower your taxable retirement income. This is especially true if the value of your retirement portfolio went down by 15 percent or more last year: n Take some spendable money out of your retirement accounts to reduce future RMDs. Since the IRS raised the standard deduction and adjusted federal tax brackets for inflation for 2023, withdrawing the correct amount could keep you in the “Goldilocks zone” for limiting their taxable impact. n Roll over some money out of your 401(k) account directly into a Traditional IRA, then convert that money to a Roth IRA. You’ll pay taxes on the conversion, but then you’ll never have to take money out of your Roth. And if you do, your withdrawals will be tax free. n Use this same strategy—known as a backdoor Roth IRA conversion—to bypass income restrictions that might otherwise keep you from making Roth IRA contributions. Many thought SECURE 2.0 would close this loophole for wealthy investors, but the Act left it intact. n If you’re over 70½ and charitably inclined, you can donate up to $100,000 each year from your IRA directly to qualified nonprofits. You can deduct these Qualified Charitable Deductions (QCDs) directly from the RMD amount you’d normally need to pay that year. And, starting this year, the annual QCD limit will rise with inflation. n If you’re still working, consider diverting more or all of your 401(k) contributions to your Roth 401(k) account. That way, you’ll never have to pay taxes when you take out money from that account. Better yet, you won’t have to take out any money at all while you’re still alive.

The many benefits from this legislation will be rolled out over the next few years. While some are clear-cut, many will be open to interpretation. Most of these benefits are not going to present one-size-fits-all solutions. That’s why it’s smart to put these opportunities into context by talking with a qualified, fee-only fiduciary financial advisor. Not all advisors have this expertise. Having an advisor specializing in dynamic retirement income planning can help you understand which elements of SECURE 2.0 you should—or shouldn’t–take advantage of to secure the retirement you deserve.