Securing 2023: What the SECURE Act 2.0 Means for You Right Now
The financial community has been abuzz over the SECURE Act 2.0 updates that the Biden administration recently put into effect. But it’s easy to miss the forest for the trees, as it’s jam-packed with updates and financial jargon. So what does this mean for you and your investments?
Simply put, SECURE 2.0 amends legislation with the goal of bringing retirement into reach for more people by making it easier for employers to provide plans to their staff, cutting restrictions for those who are nearing retirement age, and simplifying rollovers and early withdrawals. No matter where you are in your timeline, here are a few ways you could benefit from SECURE 2.0 this year.
Increased RMD Age
Until now, Required Minimum Distributions have kicked in at age 72, meaning you have to begin withdrawing from your 401(k) or IRA by that age. The recent updates have increased that age to 73 for this year and will further increase it to 75 in 2033. This means if you have supplemental retirement income, you can use those funds before drawing from your retirement accounts, allowing more time to accrue interest. It’s also a great way to delay distributions if the market has caused devaluation, buying time for your retirement funds to possibly bounce back (provided the market begins moving upward). If you decide to delay pulling from your 401(k) or IRA, talk with your advisor about the impacts on your tax bracket; you may want to utilize Roth conversions to lower your taxes.
Slashed Excise Tax
Along with allowing for further delayed RMDs, SECURE 2.0 has halved the excise tax on noncompliance with required distributions. Previously, account holders were fined 50% on RMDs that weren’t distributed per year. That’s a hefty fine! The new update has revised the fee to 25% and further reduces it to 10% if you correct the shortfall within two years.
Self-certifying Your Needs
Did you know that employees with qualifying plans can take in-service hardship withdrawals from their employer-provided 401(k)s or 403(b)s? This means that for qualifying emergency needs, employees are able to withdraw from their retirement accounts without facing early withdrawal penalties. However, until recently, employees had to provide evidence to prove the validity of their need, which was then subject to approval. Under certain circumstances, the new legislation allows employers to rely on self-reporting from the individual in need to approve emergency withdrawals. This significantly reduces the red tape that can clog up the process of receiving much-needed emergency funds; however, it only applies to plans in effect beginning in 2023.
Retirement Accounts for Domestic Workers
SECURE 2.0 now allows employers of domestic workers to provide retirement benefits through simplified employee pension plans. This means that retirement plans are more accessible to nannies, housekeepers, privately contracted elder-care providers, and gardeners.
Flexibility for 529s
If you want to provide for your children or grandchildren, a 529 is a great, tax-advantaged way to help them save for school, especially college. The downside is that those funds are restricted in use for educational purposes only. The new updates allow 529s to be rolled over into ROTH IRAs as long as the plan has been maintained for a minimum of 15 years before being converted. Previously, withdrawing 529 funds without using them for qualified educational expenses was only possible with a penalty fee, but now you can save for your successors to go to college without worrying about how to use that money if they opt out of college.