Financial Insights

Secure Act 2.0 – What You Need to Know Part 1

On December 29th 2022, President Biden signed into existence the Secure Act 2.0 which builds on the changes made to the original Secure Act passed in 2019. The bill aims to reshape the structure of American’s 401(k), 403(b), IRA and other retirement plans by increasing flexibility and updating the process of both contributing and withdrawing. Regardless of whether you’re at the beginning, middle or end of your professional life, there is some part of the 90+ provisions which will likely affect your financial picture. Though changes may not immediately take place in 2023, it is extremely important to speak with your Wealth Advisor and become familiar with them. Below are some of the key highlights:

New Required Minimum Distribution (RMD) Rules:

Under the previous law, retirees had to begin taking RMD’s at age 72. For calendar year 2023 and Secure Act 2.0, the RMD age increases to age 73 for a person who attains age 72 after Dec. 31, 2022 and age 73 before Jan. 1, 2033. It will increase again to age 75 in 2033 for an individual who attains age 74 after Dec. 31, 2032. For those who failed to take RMD’s on a timely basis, the IRS penalty has been cut in half from 50% to 25% effective in 2023.

Catch Up Contributions – Qualified Plans (401ks, 403bs) & Non-Qualified Plans (IRAs, Roth IRAs):

As a reminder for folks, there are three types of qualified plan contributions: Employee Deferral ($22,500 for 2023), Employee Catch-Up Contributions ($7,500 for 2023) and Employer Contributions (TBD). Try to think of them in three separate buckets and it should clear up any confusion with the below information.

Catch-up contributions allow folks age 50 and older to set aside additional dollars beyond the standard maximum contribution to workplace plans such as 401ks/403bs and IRAs. Secure Act 2.0 increases the maximum additional amount that can be contributed to a workplace plan if you’re age 50 and older from $6,500 to $7,500. In addition, if you’re ages 60 to 63, you’ll be able to add $10,000.00 more per year above the standard limit beginning in 2025.

One important item to note, beginning in 2024 all Employee Catch-Up contributions to Qualified Plans must be Roth contributions for participants with compensation equal to or greater than $145,000.00.

The catch-up contribution amount for individual retirement accounts (IRAs) is currently set at $1,000 and does not adjust for inflation. Beginning in 2024, the legislation would index the IRA catch-up contribution for inflation in $100 increments.

Updates/Expansion to Roth Rules:

Under current law, there are no provisions that accommodate employer matching contributions to employees’ after-tax Roth 401(k) plan contributions. Effective in 2023, individuals can choose to have employer matching contributions directed to their Roth workplace accounts. These contributions will be considered taxable income in the year of the contribution.

In addition, effective in 2023, employers will be allowed to create Roth accounts, open to after-tax contributions, for SIMPLE and SEP retirement plans. Under previous law, these plans only allowed for pre-tax contributions.

Under current law, Roth 401(k)s (unlike Roth IRAs), are subject to RMDs. A provision in the SECURE 2.0 Act eliminates RMD requirements for workplace-based Roth plans beginning in 2024. This change results in Roth 401(k)s having similar treatment related to RMDs as Roth IRAs.

529 Plan Rollovers

Under the previous law and still in effect for 2023, leftover balances for 529 plans can be taken as non-qualified distributions. The earnings portion of the distribution is subject to income tax and a 10% penalty. Beginning in 2024 and under new law, folks are allowed tax and penalty-free rollovers from 529 plans to the 529 plan beneficiary’s Roth IRA. There are limitations though:

This certainly reduces some fear of overfunding a 529 plan and provides an appropriate way to clean up any leftover 529 plan funds you have no intention to use.

Final Thoughts & Next Steps…

A couple items Secure Act 2.0 did not address is the current state of Social Security along with the 10-Year rule for Inherited IRAs. We will continue to be patient and update our clients once there is additional clarification on both of these topics.

Secure Act 2.0 is a comprehensive piece of legislation with over 90+ provisions and will affect the retirement landscape over the next few years. It will be easy to be overwhelmed and you may ask yourself “how does this apply to me?” It’s a perfect time to assess where you stand today and discuss which changes could be most beneficial to you. Please do not hesitate to reach out to your ACM Wealth Advisor.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


Contact Us Today!

    I am interested in

      Investment and Wealth Commentary
      Delivered to Your Inbox Weekly