On December 29, 2022, the President signed the SECURE 2.0 Act of 2022 (SECURE 2.0), providing increased options for retirement planning and, ultimately, increasing the retirement savings for Beacon Pointe clients and individuals nationwide. SECURE 2.0 is a second bipartisan retirement bill that continues the tax and policy reform of its predecessor, the Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0), which took effect in 2020, providing the most significant changes to retirement plans in over a decade. SECURE 2.0 is over 350 pages long and implements over 100 more tax and policy reform provisions to expand retirement savings. Below are a few key highlights of SECURE 2.0 for our individual and small business owner clients.

Increase in Required Minimum Distribution Age Beginning in 2023

Account holders of certain employer-sponsored plans, traditional IRAs, SEP, and SIMPLE IRAs are mandated to take a required minimum distribution (RMD) annually based on the account balance and the account owner’s life expectancy. SECURE 1.0 increased the age that account holders must begin RMDs to 72 (from 70 ½), beginning in 2020. With the passage of SECURE 2.0, the new required beginning date for RMDs is increased to 73 starting January 1, 2023, and 75 beginning January 1, 2033.

Increased IRA Catch-Up Limits with Cost-of-Living Adjustments

Under SECURE 2.0, starting in 2024, individuals over age 50 will, for the first time, benefit from an inflation adjustment to the IRA catch-up contribution ($1,000 in 2023). The over age 50 catch-up contribution limit for employer-sponsored plans has long been indexed for inflation. Further, starting in 2025, there is some good news for those aged 60, 61, 62, or 63 as they may contribute the greater of $10,000 or 150% of the 2024 catch-up contribution indexed limit. The bumped-up catch-up contribution limit for those aged 60-63 will then be indexed for inflation after 2024.

However, one tradeoff for these more generous catch-up contribution limits is that starting in 2024, anyone over age 50 contributing to a 401(k), 403(b), or governmental 457(b) plans (but not catch-up contributions for IRAs) with prior year wages over $145,000 would need to fund all their catch-up contributions with post-tax dollars (but benefit from tax-deferred growth on these already taxed contributions). The $145,000 wage threshold only applies to the employer sponsoring the plan and will be indexed for inflation.

Planning Tip: (1) Contribute as much to retirement plans as you can afford based on your financial plan to take advantage of tax deferral and asset protection. (2) Business owners who are self-employed and do not have wages may still be able to deduct catch-up contributions. (3) As the wage limitation applies to the wages paid by the employer sponsoring the plan, individuals that change employers mid-year may have additional planning opportunities during transitional years.

Additional Charitable Giving Opportunities with Retirement Accounts

Individuals may now make a one-time distribution of up to $50,000 (adjusted for inflation) from an IRA to a charitable gift annuity or charitable remainder trust. These charitable strategies provide an income stream for the individual during their life, and any excess assets at their death benefits charities. Further, the maximum qualified charitable distribution (QCD) amount of $100,000 will be adjusted annually for inflation.

Planning Tip: Given the lifetime threshold of $50,000, the charitable gift annuity will likely be more beneficial for most taxpayers as the charitable remainder trusts may be more complex and costly for tax and legal expenses. Utilizing QCDs can be a great way to make charitable gifts as it counts toward your RMD for the year, and the distribution is excluded from taxable income.

Rollovers from 529 Accounts to Roth IRAs

Currently, unused assets in 529 accounts cannot be withdrawn for non-education purposes or rolled over to another plan unless a penalty is paid. Under SECURE 2.0, if the 529 account has been open for 15 years or more, unused 529 assets may be rolled over to a Roth IRA in the name of the 529 account beneficiary penalty-free. Though there is no income limitation typically associated with Roth IRA contributions, the transfer rules did not waive the earned income requirements for Roth contributions. The maximum amount allowed to be rolled over per year is $6,000 (adjusted for inflation) and $35,000 over a lifetime. Rollovers may begin in 2024 and may not include any contributions made in the five years before the date of the applicable rollover.

Planning Tip: Rolling unused 529 plan funds to a Roth IRA for the beneficiary can both jump-start a child’s retirement savings and avoid 529 plan withdrawal penalties for non-qualified expense use (i.e., expenses unrelated to education). Contact your Beacon Pointe advisor if you think you may have funds left in a 529 plan that may benefit from a rollover to a Roth IRA for your loved one.

Surviving Spouse Election to be Treated as Deceased Spouse

Beginning in 2024, if a deceased spouse was not already receiving RMDs at the time of their passing, the surviving spouse may elect to be treated as the deceased employee for purposes of taking RMDs. Benefits of this election include:

• The surviving spouse’s RMDs will be delayed until the deceased spouse would have reached their required beginning date.
• Once RMDs begin, the surviving spouse may reduce their annually required distribution by using the Uniform Lifetime Table rather than the Single Lifetime Table applicable to beneficiaries to calculate RMDs.
• For surviving spouses not yet subject to RMDs, any eligible designated beneficiaries (i.e., beneficiaries not more than ten years younger than the deceased surviving spouse, disabled or chronically ill beneficiaries, and minor children) are treated as if they were the original beneficiaries of the account, which means they are still eligible for RMDs to be paid out over their lifetime, rather than over the ten-year mandatory distribution rule brought on by SECURE 1.0.

Planning Tip: Upon the death of a spouse, contact your attorney to determine whether to elect to be treated as the deceased spouse for RMD purposes, especially if you are benefitting from the retirement plan of a younger spouse. Surviving spouses also have options to treat the inherited account as their own by rolling an inherited account into their own IRA or an inherited (or Beneficiary) IRA.

Changes to Roth Retirement Accounts

Roth Plan Distributions: Unlike Roth IRAs, before SECURE 2.0, Roth 401(k) plans required that an employee take RMDs (similar to a traditional IRA). Beginning in 2024, RMDs will no longer apply to Roth 401(k) plans, allowing continued tax-free growth beyond the previous RMD start date.

Roth Employer Match: Employers may now elect to make matching employer contributions to Roth 401(k) and 403(b) accounts. The contributions will be included in the employee’s taxable income and may not be subject to a vesting schedule. Future eligible withdrawals are not subject to income tax.

Creation of SIMPLE & SEP Roth IRAs:  Beginning in 2024, employers and employees will be allowed to contribute to SIMPLE and SEP Roth IRAs. Such contributions are capped at the lesser of 10% of employee compensation or $5,000.

Matching Employer Retirement Contributions for Student Loan Payments

Beginning January 1, 2024, employees may choose to apply matching employer contributions to qualified student loan payments. If electing to do so, employers may match student loan payment contributions to an employee’s 401 (k), 403(b), or SIMPLE IRA (or 457(b) or another plan applicable to government employees).

Planning Tip: Younger individuals unable to afford both student loan payments and savings to an employer retirement plan may not have to miss out on an employer match starting next year.

Benefits for Accounts for Individuals with Special Needs

Expanded Age Eligibility for ABLE Accounts: ABLE accounts are tax-advantaged accounts for disabled individuals that are not countable as income or resources for governmental benefits. Beginning in 2026, ABLE accounts will be able to be established for individuals who became disabled before age 46 (increased from age 26).

Stretching IRA RMDs for Special Needs Trusts with Charitable Remainder Beneficiaries: Under SECURE 2.0, a charitable organization may now be the remainder beneficiary of a special needs trust without losing the beneficiary’s ability to stretch RMDs over their lifetime. Previously, the ability to stretch RMD annual payments over the lifetime of the special needs beneficiary would be lost if a charity was named the remainder beneficiary of a special needs trust.

Increased Credits for Small Employer Pension Plan Startup Costs and Contributions to Startup Plans

Under SECURE 1.0, small businesses with under 100 employees may take a tax credit for establishing new retirement plans. The annual credit is allowed over three years and is the lesser of 50% of the cost to establish the plan or $5,000. Beginning in 2023, SECURE 2.0 expands the benefit for employers with 50 or fewer employees by increasing the threshold to the lesser of 100% of the cost to establish the plan or $5,000. Additionally, beginning in 2023, SECURE 2.0 creates a new tax credit for employers with 50 or fewer employees that contribute to an eligible plan, up to $1,000 per employee. The entire credit is available in the year the new plan is established and the four following years at decreasing percentages.

Planning Tip: If you are a small business owner creating a retirement plan for yourself and your employees, speak with your tax professional to ensure you may claim the tax credit.

Retroactive First Year Elective Deferral for Sole Proprietors

Sole proprietors and similar business owners, including single-member LLCs, may create and retroactively fund solo-401(k) plans after the end of the year through the individual tax filing deadlines (without extensions).

Planning Tip: If you are a sole proprietor or own a similarly structured business, consider setting your year-end review with your tax advisor in the first quarter of each year. Review your profitability annually to determine if establishing a new solo-401(k) plan or retroactive deferrals funding an existing plan will be beneficial for you and your business.

Increased Exceptions to the 10% Tax on Early Distributions

Generally, if an individual withdraws from a retirement plan prior to age 59 ½, the individual must pay an additional 10% early withdrawal tax unless an exception applies. SECURE 2.0 expands existing exceptions and creates new exceptions. Remember, these distributions will likely be taxable as ordinary income but exempt from the 10% early withdrawal penalty.

• Purchase of Long-Term Care Contracts: Individuals may take distributions to purchase long-term care insurance, up to the lesser amount of the premium paid, 10% of the accrued benefit, or $2,500 (adjusted for inflation).
• Terminal Illness Exception: Individuals may take distributions if a physician certifies that an individual is reasonably likely to pass away within the next 84 months (7 years).
• Domestic Abuse Exception: Within one year after an incident of domestic abuse (as self-certified), a victim may withdraw the lesser of $10,000 (adjusted for inflation) or 50% of the account’s value.
• Federally Declared Disasters: Individuals afflicted by federally declared disasters may withdraw up to $22,000 from employer retirement plans to assist with recovery. The withdrawal may be repaid within three years, or the taxes due on the income may be spread out over three years. The President must declare the disaster and the distributions made within 180 days of the declaration.
• Emergency Expense Withdrawals: Beginning in 2024, employees may take up to one retirement distribution each calendar year, up to the lesser of $1,000 or the nonforfeitable accrued benefits, to cover emergency financial needs (as self-certified). The withdrawal may be repaid within three years. Additional emergency distributions are not permissible during the repayment period until the initial distribution is repaid.
• Repayment of Qualified Birth or Adoption Distributions: Distributions for qualified birth and adoption qualify as an exception and may be repaid to the retirement account within three years.
• Self-Certified Hardship Distributions: For distribution purposes, employees will be allowed to self-certify that the conditions for a hardship waiver have been met. Hardship distributions were already available for an “immediate and heavy financial need;” more information on hardship distributions can be found here.

Additional Highlights

SECURE 2.0 provides over 100 changes to retirement law. Numerous key changes may impact your retirement planning, and a few additional highlights are below:

• The penalty for failing to take an RMD is decreased from 50% to 25% and may be reduced to 10% if the RMD is corrected in a timely manner. Missed RMDs applicable before 2023 are still subject to the 50% penalty. Taxpayers may still request a waiver of the overall tax.
• In 2024, the employer contribution limits for SIMPLE IRAs will increase, varying based on the number of employees.
• Beginning in 2025, SECURE 2.0 expands the mandatory eligibility in the company’s 401(k) and 403(b) plans for part-time employees to individuals that work at least 500 hours per year for two or more consecutive years.
• Beginning in 2025, employees will be automatically enrolled in certain 401(k) and 403(b) retirement plans. An employee may opt out if they do not wish to participate.
• Taxpayers may establish a SEP IRA plan for household employees.
• Within the next two years, the Treasury Department will implement a retirement plan online searchable database that allows individuals to search for lost retirement plans.
• By 2025, the Treasury must release guidance and sample forms to standardize the rollover process. The forms will simplify direct rollover and trustee-to-trustee transfers among eligible retirement plans.
• SECURE 2.0 establishes a new employer-sponsored Starter 401(k) Plan (or safe harbor 403(b) plan) for employers with no retirement plan. Such plans require automatic enrollment (though the employee may opt-out), only allows employee deferrals, and the contribution limit is the same as the IRA contribution for that year. These plans are not treated as top-heavy plans benefiting key employees.

Next Steps

Meet with your financial, tax, and legal advisors to discuss your financial position, including current retirement plans and how the SECURE 2.0 Act of 2022 impacts you. Recommendations may differ depending on your financial situation.

This material provides general information only. Beacon Pointe Advisors does not offer legal or tax advice. Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein.

Copyright © 2024 Beacon Pointe Advisors, LLC®. No part of this document may be reproduced.