Last week, the SECURE Act 2.0 was signed into law.
What does this mean for you and your retirement?
In this episode, we cover the most important changes from the SECURE Act 2.0 that you need to be aware of.
These changes include:
Age for required minimum distributions
Effects on retirement accounts
Automatic enrollment
Treatment of student loan payments
Distributions from 529 plans to Roth IRAs
And more
Mentioned in this episode:
Transcript
April Schoen: Hello, everyone, and welcome to another episode of The Secure Retirement podcast. This is one of your hosts April Schoen. And today, I'm going to be talking about a new bill that was recently passed by Congress and was signed into law by President Biden. And this is the SECURE 2.0 bill. Now, if you may remember that the SECURE Act was enacted back in 2019, and made some pretty big changes to retirement plans. Well, this is really the follow-up to that, which is why it's called SECURE 2.0. But it's also known as the Enhancing American Retirement Now Bill, okay. And like I said, it was recently passed by Congress and signed into law by President Biden.
And today, what I'm going to do is I'm going to go through some of the more important changes and provisions for you to know about. And this bill is very comprehensive, there were a lot of big changes that were made. Some of these go into effect now. And some don't even apply until 2024, 2025, or even 2033. But we're going to kind of go through what I think are some of the more important ones for you to be aware of.
First, one of the most important changes that happen is, this bill is increasing the age for required minimum distributions. Now, you may remember that required minimum distributions used to start at 70 and a half. And required minimum distributions say that at a certain age, you have to start taking money from your retirement accounts, whether you want to or not. So some people call these RMDs, it's required minimum distributions. It used to be 70 and a half. And then the SECURE Act actually changed it to 72. Now, with the SECURE 2.0, it's now increasing from 72, to 73. And that's gonna go into effect on January 1, 2023. And then, in 2033, it's going to increase again to age 75.
But the most important thing for you to know is required minimum distributions are now going to start at age 73, not at age 72. They've also made quite a few other changes to retirement accounts. This applies to 401k's, 403b's, some simple plans as well, we're going to kind of go through. And really, the purpose of this bill was to increase contributions. Was increased for people to be able to start saving on their own for retirement. Okay. Because we all know the numbers. We all know that most Americans are not saving enough for retirement.
In fact, if you look at some of the statistics, it's pretty scary, actually, when you start thinking about how little people are actually prepared. So this act really was designed to encourage people to save for retirement, to increase how much they can put in those retirement accounts. And then that's also why they're extending that age from 72, to 73. So what they're trying to push out when you actually have to start taking money from these plans, if you don't need it. Now, I know, John and I, when working with our clients, a lot of our clients don't want to take required minimum distributions. They may not need it, especially if they have a pension or Social Security.
And honestly, people are working longer. People are living longer, they're deciding to continue to do something. And so they may not really need to take anything from those retirement accounts. So I do think it's a good thing that they're extending those required minimum distributions. Now, let's get into some of these other changes and some of these plans. And again, I'm just gonna go through high level, and if there's anything here that jumps out at you that you're like, oh, I want to know more about that. Make a note of it, jot it down. And then let's jump on a call. And we can go through the details with you and how it may apply to you.
So one things that they did is they're actually having a provision where people can take money out of their retirement accounts, without having to pay a penalty. A lot of people take money out of their retirement accounts, but then pay penalties to the IRS and it's because they don't have money in savings. They don't have an emergency fund, so they have to go to this retirement account. Maybe let's just call it their 401k, somewhere where they've been saving money that they haven't paid tax on. But if you go to take that money out and you're under the age of 59 and a half, well, not only do you have to pay regular income tax on it, but you also have to pay a 10% penalty for withdrawing it early.
So one of the changes with this bill that they're going to make is they're going to allow participants from their retirement accounts to take out up to $1,000 per year. And now this is going to be for certain emergencies. These are, they're calling them unforeseeable or immediate financial needs relating to personal or family emergency expenses. And the participant can do a one-time distribution per year of up to $1,000. And they do not have to pay that additional 10% penalty for early distributions. Participants will also have the ability to repay that distribution back into the plan within three years, but they don't have to, okay. And this change is actually not going into effect until 2024, okay.
One of the other big changes that's happening is they're going to expand automatic enrollment into retirement plans. So right now, the SECURE 2.0 Act is going to require new 401k and 403b plans to automatically enroll participants in these plans when they become eligible. And initially, they have to contribute at least 3% of their gross salary into the plan, but it can't exceed 10%. And then each year thereafter, that automatic contribution has to get increased by 1% until it reaches 10%. And again, this is going to be for all new 401k and 403b plans. There is a, all current plans are going to be grandfathered in. And there's going to be an exception for small businesses with 10 or fewer employees, okay. And again, this, this does not go into effect until after 2024.
So that is a big change, because now you're going to have it where if you start a new position somewhere and you're first starting to work, you're not going to have the option, you're going to automatically be enrolled in that 403b or that 401k and automatically be contributing into the plan on your behalf. But you will have the option to opt out. So they're going to automatically enroll you in it. But you can choose not to do that.
There is going to be a provision for what they're going to call starter 401k's and this is going to be for employers that do not already have a retirement plan. It's going to allow them to offer what's called a starter 401k or a safe harbor 403b plan. And this was really going to be, I'm thinking it's more for those like small businesses that don't have a retirement plan because of some of the administrative costs that's, that is baked into those. And so this is going to allow, they're calling it a starter 401k plan so that employees of those companies are able to have a retirement account and save for their retirement account as well.
Another change is going to be it's kind of interesting, it's the treatment of student loan payments. And let me kind of explain this one for a few minutes here. So what's gonna happen is if you've got an employee who's currently paying on student loans, the employee can use those student loan payments, and they can be considered deferrals into a retirement account for the purposes of matching contributions. Okay, so let's kind of unpack this one for a minute. So it's this is really intended to help those employees who may not be able to save for retirement because of student debt, okay. And so these employees may be missing out on those matching contributions from an employer.
So let's say you've got an employer that matches 3% of whatever the employee puts in. So the employee puts in three to the 3%, their 401k, and the employer is also going to be matching that and putting 3% and to the 401k. Well with this new provision, the employee is going to be able to use their student loan payments to be considered as elective deferrals for those matching contributions. So in that case, if the employee is paying on student loans, and again, let's just say the employer matches 3%, then they're going to be able to say, okay, I'm putting money towards my student loans, the employer is going to consider that elective deferrals, even though nothing's going into my retirement account. But then the employer will then match those contributions, and it's going to go into the retirement account.
So that's going to be for student loan payments to be treated as contributions for the purpose of matching contributions for the employer. Again, this is really all designed to kind of expand retirement plans, where you've got more plans where people can contribute, more ways that money can go into these plans to help Americans save for retirement. One of the other big things that's happening too is it's going to be increasing how much you can put into your retirement accounts. So under current law, the limit on IRA contributions is increased by $1,000. And this is called the Catch Up Provision for people who are over the age of 50.
So if you were over the age of 50, you're actually able to put more into your IRAs, your regular IRAs and your Roth IRAs. Well, what's going to happen in 2024, is that $1,000 increase is now going to be indexed. So now we're gonna see, it's not just going to be $1,000, but it's actually going to increase over time. Okay. And then they're also going to be increasing how much you can put into your IRAs, if you are between the ages of 60 and 63. Okay, so they're going to actually increase how much you can put in as you get older. And again, that's going to take effect in 2025 for those retirement accounts. They are also increasing some credits for small businesses that are starting up pension plans. How much of those administration costs they get a credit for, so they're increasing that. they are making some changes to simple plans.
So current law requires employers with simple plans to make employer contributions of either 2% of compensation, or 3% of the employee elective deferral amount. And now they're going to be able to increase that. So under the SECURE 2.0, the employer can make additional contributions, up to 10% of compensation, or $5,000. And that's going to be indexed, so that will increase over time as well. The Act also increases how much employees can put into simple plans, okay. It's going to improve coverage for part-time workers. So the SECURE Act requires long-term part-time employees to be covered under retirement plans. So we're going to see some changes to those rules to expand coverage for retirement accounts, to those part-time workers.
And then there's also going to be a special rule from distributions from 529 plans to Roth IRAs. So I think this is actually going to be very beneficial as well. So right now, what the SECURE Act 2.0 is going to allow is it's going to allow for tax and penalty-free rollovers, from 529 to Roth IRAs. So let's unpack this for a minute. Let's say you've got a child or you have one yourself, you've got a 529 plan. And now a 529, that's a college savings account, where people put money in, it grows tax-free, and then they can use those funds tax-free to pay education-related expenses. But sometimes there's a question or a problem of what happens if the beneficiary has completed school, and there's still money left in the 529. It can kind of create a little bit of a tax trap.
So now under the SECURE 2.0, what beneficiaries are going to be able to do is if they have a 529, they're going to be able to rollover up to $35,000 over their lifetime, from any 529 account in their name to their Roth IRA. Okay, now, these rollovers are going to be subject to Roth IRA annual contribution limits. And the 529 account must have been open for more than 15 years. So there's definitely gonna be some nuances to it. And we'll kind of learn more as these go into effect but I do think this will be important planning for people who have these 529 plans for their kids or grandkids. Because basically what happens is these, these funds, they kind of get trapped in these 529 plans, or they either have to take them out and pay some sort of penalty. So this is at least gonna give some options. But again, they're gonna be able to do up to $35,000 over their lifetime, from a 529 plan into the Roth. But that 529 plan has to be open for more than 15 years. Okay, and this will go into effect in 2024.
There were also some changes to what's called a QLAC. Now a QLAC is a qualifying longevity annuity contract. Now you may remember, remember that QLACs first came into effect in 2014. There were some regulations that allowed for QLACs. And what QLACs do is it allows you to carve off part of your retirement accounts to set it over into what's called a deferred income annuity. And so basically, you're carving out part of your retirement accounts to say, I'm not taking income from it now. But I'm gonna start taking income later, let's say at 75, or 80, or age 85. And what happens is that money that set over in these QLACs, you do not have to take a required minimum distribution from those funds. You don't have to, you no longer have to count those as part of your RMD calculations. Now, QLACs were a good start, but they did impose a limit on how much you could put into it.
So now what's going to happen with SECURE 2.0 is it's going to allow up to $200,000 of retirement accounts to go in, of the account retirement account balance, to go into a QLAC, okay, and then that $200,000 is also going to be indexed, so it's going to increase over time. So that will really help those that are looking for ways to reduce those required minimum distribution, okay. And then one of the other changes that they made too was to say, if you do not take out your required minimum distributions on time, currently, the penalty for not taking out your required minimum distribution is 50%. So let's say that you gotta take out $5,000 from your IRAs, for your required minimum distribution, but you don't do it, you don't take it out. Well, the IRS would actually impose a penalty of half of that, so you'd have to pay a penalty of $2,500.
So you'd still have to take the $5000 out, and you still have to pay tax on it, and you'd have to pay this penalty. Well, what they're going to do is they're going to reduce that penalty from 50%, to 25%. And they're also going to say that, if you do take it in a timely manner, then it's going to be further reduced from 25, down to 10. Okay, so they're just making some changes to any sort of penalties that are applied to these required minimum distributions. They did also increase, they're gonna do some, some make some changes to what's called qualified charitable distributions. You've got some one-time elections. They're also going to be increasing the amount of that you can do for a charitable distribution as well. So again, if those are things that are important to you, things you want to know more about let us know, we can kind of get you some information on those.
So like I said, the SECURE 2.0 Act or this Enhancing American Retirement Now Act is very comprehensive. It made some pretty big changes. This isn't even all the changes that they did, this is just going over more of a highlight for you and what may be most important for you. So, and some of these provisions kind of gets complicated too, because some of them are taking effect right away. Some of them aren't until 2024, or 2025, or after. So it's gonna get a little bit complicated as we're working through some of this.
But if you've got any questions about the changes, and this bill, how it may apply to you, I'd recommend that you call our office and schedule a time for a phone appointment. You can reach our office at 850-562-3000. Again, our number is 850-562-3000. And as always, as any of these new laws or changes come into effect, we'll be, you'll be the first one to hear about it. We'll be getting out some information in emails, or also in our podcast as well. So again, if you have any questions about that, let us know. And we'll kind of keep you posted as more information becomes available. Talk soon.
Voiceover: If you'd like to know more about our services, you can request a complimentary information package by visiting johnhcurry.com/book. Again, that is johnhcurry.com/book. Or you can call our office at 850-562- 3000. Again that number is 850-562-3000 John H. Curry, chartered life underwriter, chartered financial consultant, accredited estate planner, Masters in Science and financial services, certified in long-term care. April Schoen and John Curry are registered representatives and financial advisors of Park Avenue Securities, LLC. Securities products and advisory services are offered through Park Avenue Securities, a registered broker-dealer and investment advisor. This firm is an agency of the Guardian Life Insurance Company of America. Guardian, New York, New York. April Schoen is a financial representative of the Guardian Life Insurance Company of America. Guardian, New York, New York. Park Avenue Securities is a wholly-owned subsidiary of Guardian. North Florida Financial isn't an affiliate or subsidiary of Park Avenue Securities. Park Avenue Securities is a member of FINRA and SIPC. This material is intended for general public use. By providing this material we're not undertaking to provide investment advice for any specific individual or situation or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. All investments contain risk and may lose value. Past performance is not a guarantee of future results. Guardian, its subsidiaries, agents or employees do not provide legal, tax or accounting advice. Please consult your attorney, accountant and/or tax advisor for advice concerning your particular circumstances. We are not affiliated with the Florida Retirement System. The Living Balance Sheet and the Living Balance Sheet logo are registered service marks of the Guardian Life Insurance Company of America, New York, New York. Copyright 2005 through 2023. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities or Guardian and their opinions stated are their own.
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