As estate planning attorneys, we see the positive impact of smart retirement planning. We also see the sad results from no retirement planning. Here is what we think you need to know about Secure Act 2.0, designed to help Americans build up their retirement savings, and successfully cope with personal financial hardships.  

What is the SECURE Act, and Why 2.0?

The SECURE Act is federal legislation passed in 2019 that provides several measures and incentives to improve the financial security of the future retired American. These provisions include increasing tax credits in relation to retirement savings, expanding the eligibility of retirement plans to part-time employees who work for an organization long-term (at least 500 hours for three consecutive years), changing age limitations for IRA contributions, and encouraging employers to offer lifetime income retirement benefits in their retirement plans. 

SECURE 2.0 Act expands upon this legislation and broadens the scope in some ways that could be pretty advantageous to those who utilize them. Let’s take a look at a few that piqued our interest. 

IRA Catch Up Payments and RMD Age

For those individuals who are a little bit older, several provisions have been created to help build the nest egg up and keep it intact longer. As we age, we are eventually required to take minimum distributions (RMDs) from our IRA retirement accounts. The SECURE 2.0 act will change the initial RMD age from 72-73 in 2023, and again up to 75 years old in 2033. Additionally, if you fail to take your RMD, there is currently a jaw-dropping 50% excise tax. This act reduces that tax to a far more reasonable 25%. 

For older working individuals who are hoping to catch up on their retirement contributions, higher IRA contribution limits are permitted. The “Catch-Up Contributions” for individuals over 50 at this time is $7,500/year. SECURE 2.0 is slated in 2025 to allow Americans aged 60-63 to contribute 50% more than the previous limit (around $10,000 annually).       

529 Accounts, Emergency Funds, and Financial Hardships

(add text) 529 Accounts are educational savings accounts that are sponsored by a state. Under the SECURE 2.0 Act, the beneficiary of a 529 Account could potentially roll up to $35,000 from a 529 into a Roth IRA account. As an example, say a child receives a $50,000 529 account from his grandparents. He goes to trade school and uses only $20,000 for his education, leaving $30,000 in the account. Before SECURE 2.0, this money could be withdrawn from the 529 account, but it would be taxed. After SECURE 2.0, if the account has been open for over 15 years, the money in that 529 account can be rolled over into his Roth IRA for retirement. These contributions are subject to annual limitations and a lifetime $35,000 maximum. 

To encourage individuals to save for emergencies, beginning in 2024, an employer can create an emergency Roth-style savings account for their employees where the employee can build an emergency fund of up to $2,500. Current statistics suggest that only around 30% of Americans could afford to pay out of pocket for a $1,000 emergency. Which brings us to the financial hardships provisions. In the event of financial hardship, under SECURE 2.0 an individual could withdraw up to $1,000 per year from a 401K or IRA penalty free. The employee can repay this distribution within three years, and no additional distributions will be permitted during that repayment period until the distribution is repaid in full. 

Conclusion: Save Now, Benefit Later

(add text) As estate planning attorneys, we have seen the peace and contentment that comes from wise retirement planning, especially for those who begin to save as much as they can from a young age. We cannot overemphasize the importance of the concept of time value of money. Anything contributed today by a 20 year old will beat anything contributed in 30 years by a 50 year old. Regardless of your age, we encourage you to educate yourself on the SECURE and SECURE 2.0 acts, and to meet with a qualified financial advisor to ensure that you are taking full advantage of new legislation. 

These statements are provided for education and informational purposes only. Your situation is unique. This information is not a direct recommendation on how to manage or invest your retirement money. This is not investment or legal advice. Contact a qualified professional. 

To listen to our full podcast about SECURE 2.0 click here