April 5, 2023

Secure Act 2.0 Questions

There’s been a lot of buzz this year about the Secure Act 2.0, but there have also been a lot of questions. We have answers.
Stewart Willis

The Secure Act 2.0 made sweeping changes to how people can save for and fund their retirements. From reshuffling how certain retirement accounts work to provisions meant to actively encourage people to save for their eventual permanent vacation, Secure Act 2.0 packed a lot of changes into one piece of legislation.

Secure Act 2.0 could help address a key problem to our retirement system: People often don’t save enough, and don’t save early enough. It’s also created a lot of questions from people who aren’t quite sure how it works. I’ll go over several of them here.

How will Secure Act 2.0 help me save for retirement?

One significant way Secure Act 2.0 will help you save for retirement is through automatic enrollments in company retirement programs. Beginning in 2024, most new 401(k) and 403(b) plans will be required to automatically enroll employees at contributions between 3% and 10% of the employee’s total compensation. Automatic enrollments increase the likelihood that employees will participate in their company’s retirement plan.

What if I don’t want to participate?

You don’t have to! While you will be automatically enrolled, you can opt out whenever you wish. Of course, I’d encourage you to reconsider, especially if your employer matches your contributions; if you don’t contribute enough to get the company match, you are literally declining free money!

What are some other changes for retirement savers?

A big problem for people who change jobs frequently is the need to roll retirement accounts from old jobs into the ones at their current job. Changing jobs is quite stressful, especially if you also have to move to a new city or state. 

It’s common for old retirement accounts to be abandoned; you simply forget you have retirement savings inside an account at one or more of your former workplaces. In fact, there’s a whole industry dedicated to helping people find old, abandoned retirement accounts. With Secure Act 2.0, if you have a retirement account with less than $5,000 in it, the balance can automatically transfer to the retirement account sponsored by your new employer. 

Many people don’t start seriously contributing to their retirement accounts until later in their careers. Catch-up contributions are designed to help those people put more into their retirement accounts per year than ordinarily allowed. Beginning in 2025, catch-up contribution limits will increase. People ages 60 through 63 will get to contribute an additional $10,000 per year, which is a $2,500 increase over what’s currently allowed. That increase is also indexed to inflation, which means it won’t become outdated when prices increase. 

It’s common for employers to match a portion of employee contributions to their retirement accounts. Beginning in 2024, employers will be able to match your student loan payments as well; as you make payments toward your student debt, your employer can make matching contributions to your retirement account. This will be significant for many who currently have to choose between paying off their student loans or saving for retirement.

How does the Secure Act 2.0 affect me if I’m already retired?

One significant change is the age increase to Required Minimum Distributions, or RMDs from tax-deferred retirement accounts. For those turning 72 between 2023 and 2033, the starting age for RMDs increases from 70 ½ to 73. If you will turn 72 after 2034, your RMD starting age increases further to 75. 

Not only that, the penalty for not claiming RMDs drops sharply, from 50% to just 25%. This is a significant change, and one that could be positive or detrimental depending on your financial situation. Consider this example: One of my clients in his early 70s has $2 million in an IRA. He’s currently in the 0% tax bracket because he doesn’t need to take set distributions yet, and the standard deduction is high enough to cover what income he does realize. He has a choice: Wait until he’s required to take RMDs, or start taking distributions now.

Many would be tempted to wait, and with the new age limits in Secure Act 2.0, they’ll be tempted to wait even longer than they can legally wait now. If my client waits, once he is required to take distributions, he’ll have to realize around $80,000 per year from his IRA, which will catapult him straight from the 0% tax bracket to the 22% bracket. 

On the other hand, if he starts taking smaller distributions now, he can stay out of that 22% tax bracket by lowering the amount he will have to take once the requirements take effect. From a tax perspective, waiting probably isn’t a great idea for him even though it may be tempting to keep that money in retirement accounts as long as possible.

This illustrates why it’s so important to have a comprehensive financial plan that includes tax strategy; it doesn’t do much good to hoard money simply because you can — you could end up losing money due to unnecessary taxation.

Another significant change fixes a situation that never really made sense: RMDs have been eliminated for Roth 401(k)s. RMDs are meant to ensure that tax-deferred retirement savings get withdrawn, and therefore taxed, before the account holder passes away. But Roth 401(k)s are not tax deferred! 

If you have a Roth 401(k), you’ve already paid taxes on the money inside it. The government won’t tax it again when you take distributions from it. That means there’s no good reason for you to be required to distribute money from your Roth 401(k). This change eliminates that requirement entirely.

The Secure Act 2.0 is likely to have a major impact on you, whether you’re saving for retirement or already retired. Navigating the changes will add complexity to the already complicated financial planning process. At Asset Preservation Wealth & Tax, our clients know they can come to us with any questions they have about Secure Act 2.0 or any other aspect of retirement planning. Make sure to choose a financial advisor who is ready to help you navigate the ever-changing financial planning landscape.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.

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