5 Things to Know About the SECURE 2.0 Act

Since passing the Tax Cuts and Jobs Act in 2017, American lawmakers have been on a relentless tear creating new legislation that affects our finances. One of the most impactful new laws was The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which changed how the U.S. treats retirement.

But that wasn’t enough! Since the U.S. is battling a $7 trillion retirement crisis that pundits believe is only getting worse, lawmakers passed the SECURE 2.0 Act in 2022, building upon the previous legislation.

The new act aims to expand coverage and increase retirement savings for retirement plan participants and to provide more clarity and simplicity for plan sponsors. Quite frankly, this is one of the most comprehensive pieces of retirement legislation passed in decades.

While most of the SECURE 2.0 Act changes will commence in 2024 and 2025, many changes are already in effect. Though some changes are optional for employers, many of the new provisions are mandatory.

Here are five things you need to know about the SECURE 2.0 Act.

1. Increased Access to Lifetime Income via Annuity Contracts (QLACs)

The SECURE 2.0 Act makes critical changes to the feasibility of obtaining lifetime income through the purchase of a qualifying longevity annuity contract (QLAC).

QLACs are great for individuals who fear they may run out of funds during retirement, those who are interested in deferring the taxability of income, or those wishing to lower their required minimum distributions (RMD).

A QLAC is a deferred income annuity that enables plan participants to roll over funds from a qualified tax-deferred retirement plan — such as a 401(k), 403(b), 457(b), or an IRA — to a (lifetime) annuity. The annuity then pays the annuitant guaranteed income beginning on the predetermined date. Qualified funds that are placed within a QLAC will now allow retirees to delay their RMD requirements past the current age of 73 and begin as late as 85.

For all QLACs with an effective date of December 29, 2022, or later, the new act increases the amount of qualified tax-deferred retirement account funds that can be converted to a QLAC from $135,000 to $200,000. The updated legislation also eliminates the 25% percent-of-saving limitation, which allows individuals to convert funds without restriction.

These changes may barely seem material upon first glance; however, they can provide substantial benefits to plan participants. The higher conversion limits provide the potential for higher annuity income payouts per year and lowered RMD payments.

2. Retirement Catch-Up Contributions

Beginning in 2024, participants who are 50 or older, earned more than $145,000 in wages in the prior year, and make catch-up contributions to their qualified plan (with the same employer) must do so on an after-tax basis into a Roth.

This means you will no longer be able to defer the taxability of your income or receive a deduction for your catch-up contributions. Yet, you will be able to withdraw all of your contributions and earnings on those contributions tax-free should you meet the Roth tax-free distribution requirements.

On the brighter side, the IRA catch-up contribution limits of $1,000 per year for participants ages 50 and older will be indexed for inflation each year starting in 2024. Historically, the catch-up contribution limit of $1,000 has been a static amount, so this is a welcome change.

Beginning in 2025, participants ages 60 to 63 will be allowed to make “special” catch-up contributions of $10,000 or 150% of the standard catch-up contribution amount for 2024, whichever is greater. These amounts will also be indexed for inflation each year based on the IRS’s cost-of-living adjustment.

Lastly, for SIMPLE IRA plans, individuals ages 50 and over will have their annual catch-up limit increased to $3,500 for 2023 and then by another 10% in 2024. Participants ages 60 to 63 will be allowed to contribute $5,000 beginning in 2025.

3. New Qualified Charitable Distribution (QCD) Rules

QCDs are a great way for taxpayers 70.5 or older to reduce their income tax liability while also making charitable donations to a qualified organization of their choice.

In short, a QCD is a transfer of funds directly from your individual retirement account (IRA) to a qualified charity. This in turn satisfies the IRS-mandated RMD requirements, and ultimately lowers the taxability of your retirement income since the QCD is not subject to income tax as a normal RMD would be.

Since 2006, the QCD limit has been $100,000 per year. However, starting in 2024, the $100,000 will be indexed for inflation based on the IRS’s cost-of-living adjustment. This means that your QCD limit will likely increase in subsequent years (leading to a lower RMD).

SECURE 2.0 also introduced a new feature for QCDs. Under the act, participants can now make a one-time charitable contribution of $50,000 ($100,000 for a married couple) to a split-interest entity, usually via a charitable remainder trust (i.e., a CRAT or CRUT).

This feature allows the participant to direct funds to a qualified charity from the participant’s retirement account while also paying themselves income from that same charitable contribution.

While this may sound too good to be true, the usage of charitable remainder trusts has been a widely used tool by individuals looking to provide themselves with income in retirement and satisfy their philanthropic passion.

4. Expansion of Coverage for Part-Time Employees

Even as the economy changes and more people begin to carry multiple positions or work part-time, the need for retirement savings remains the same. Luckily, SECURE 2.0 has addressed this matter.

Effective for plan years beginning in 2025, long-term part-time employees will have an easier time participating in retirement plans. The act revised rules regarding eligibility for such employees — those at least 21 years old with an employer who maintains a 401(k) or 403(b) plan. The update lowers the required number of working years with at least 500 hours of service from three years to two.

This update does not include union or defined benefit plans. It also only applies to employee deferrals rather than to both employee deferrals and employer contributions.

Employees may also be eligible to obtain credit for hours worked before the implementation of SECURE 2.0. Please discuss your current vesting schedule with your employer to see if your prior service hours will be credited toward your eligibility.

This update can be critical for employees who maintain multiple employment positions but who have historically failed to meet eligibility requirements.

5. Later Required Minimum Distributions

Under SECURE 2.0 and effective as of 2023, the required age for RMDs has increased for participants and spousal beneficiaries of a participant who died prior to reaching their RMD beginning date.

For individuals who reach age 72 after December 31, 2022, and reach age 73 before January 1, 2033, the RMD age is now 73.

For individuals who reach age 74 after December 31, 2032, the RMD age is now 75.

This means that participants will now have additional time to plan for and make their RMD withdrawals.

In addition, beginning in 2024, the SECURE 2.0 Act allows surviving spouses to be treated as deceased employees for purposes of RMD rules. This means that the surviving spouse can elect to defer RMDs until the year in which the spouse reaches the RMD age (73 or 75). Because of this deferral, the RMD will be calculated under the IRS Uniform Lifetime Table vs. the Single Life Expectancy Table, ultimately resulting in a lower RMD calculation.

How to Make the Most of the SECURE 2.0 ACT

Figuring out how to take advantage of new legislation in relation to your retirement savings is time-consuming and, for some, a little daunting. Having an experienced and knowledgeable financial planner by your side can be a game-changer for your retirement planning.

Our advisors at Felton & Peel Wealth Management are here to help you build a strong financial plan and reach your retirement savings goals. Schedule a consultation with us today to get started.

Malik S. Lee, CFP®, CAP®, APMA®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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