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Changes to Individual Retirement Planning in the SECURE Act 2.0

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The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 provides additional benefits and increased flexibility for individual retirement planning.

The SECURE Act 2.0 offers benefits and flexibility for those nearing retirement and younger workers just beginning to save. Below, we offer insight for both groups.

For those closer to retirement, SECURE Act 2.0 boosts opportunities to save for retirement and make charitable donations by:

  • Increasing the RMD age to 73 as of January 1, 2023, and again to 75 in 2033.
  • Allowing larger “catch-up” contributions. Under current law, once you reach age 50, you can fund your 401(k) with an additional sum, indexed to inflation, to $6,500 in 2022, and $7,500 in 2023. The catch-up limit for employees aged 60 to 63 is increased to the greater of $10,000 or 1½ times the then current catch-up contribution amount, starting in 2025. For example, if the  2025 catch-up limit is $8,000, a 62-year-old employee would be permitted to make a catch-up contribution of $12,000.
  • Indexing the $1,000 IRA catch-up limit for inflation for tax years starting in 2024. That will be the first increase since 2006.
  • Indexing qualified charitable distributions (QCDs) for inflation and permitting a one-time gift of $50,000 to certain charitable giving vehicles that also benefit the grantor or their spouse. Currently, individuals over 70 ½ are permitted to make QCDs up to $100,000 directly from an IRA to charity, avoiding the recognition of income on the donated amount.

Our Take

  • Increasing catch-up contribution limits give individuals the opportunity to make even larger contributions as they near retirement and extending the RMD start date provides greater flexibility to make distributions between the ages of 72 and 75. More time to defer RMDs allows for more tax-free growth in the plan and provides the possibility that distributions can be made when the recipient may be in a lower tax bracket.
  • Allowing individuals to divert retirement assets to charity provides a special benefit to charitably inclined taxpayers, as they can avoid taxation on the distribution at ordinary income tax rates, and 100% of the funds can be used for charitable purposes.  In some instances, minimizing additional income can avoid pushing an individual into a higher tax bracket, which may also reduce their eligibility for certain tax credits and deductions.

For younger individuals, SECURE Act 2.0 makes it easier to save earlier by:

  • Permitting employers to make matching contributions to an employee’s 401(k) or 403(b) retirement plan, for student loan payments. Employees early in their careers no longer have to sacrifice the employer match just because they prioritize paying off student debt over saving for retirement.
  • Allowing employees to elect matching contributions in a Roth account versus pre-tax account, effective immediately.
  • Requiring employers with 401(k) or 403(b) plans to automatically enroll all new, eligible employees at a 3% contribution rate that would increase by 1% annually until it reaches 10% (previously, employers had the option to add eligible new employees to retirement plans).
  • Increasing flexibility for college savings. The new law permits certain beneficiaries to roll over up to a lifetime limit of $35,000 from their 529 college savings plan account to a Roth IRA tax and penalty free. There are certain limitations to this provision, such as requiring that the 529 plan is open for over 15 years.

Our Take

  • Some families who can afford to pay for college and graduate school out of pocket want their child (or grandchild) to bear part of the cost of their tuition and living expenses. Requiring a student to undertake the usual hardships of student debt and/or part time work has at least a few salutary effects: bolstering their investment in school, teaching them the value of budgeting and saving, fostering empathy for those who are not financially secure, and inuring them to other types of hardship, to name a few.  These new rules allow for those students who come out with student debt to forgo the difficult choice of paying off debt or saving for retirement. Expanding the automatic enrollment to all employees may also have the psychological effect of bolstering saving habits in younger workers.
  • Individuals who are reluctant to maximize funding to valuable college savings 529 plans because of fears of overfunding and being subject to tax and penalties will find some flexibility afforded by this new rule.

These are just a few of the key provisions of the SECURE Act 2.0. To determine how these new provisions may impact your financial goals, contact your advisor.

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The SECURE Act 2.0

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Disclosures

This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Periods greater than one year are annualized except where indicated. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved.

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