Estate Planning Blog

The SECURE Act 2.0: What You Need to Know to Maximize Your Benefits

The Secure Act 2.0 is legislation that aims to build on the original SECURE (Setting Every Community Up for Retirement Enhancement) Act signed into law in December 2019. The SECURE Act 2.0 builds on the original act by making changes to various aspects of the retirement system, including provisions for small businesses, multiemployer pension plans, and individual retirement accounts (IRAs). Understanding these changes is essential for individuals, employers, and financial advisors alike. Here are some reasons why:

1. Increased Access To Retirement Savings: The Secure Act 2.0 expands access to retirement savings plans, making it easier for workers to save for their future. This includes allowing long-term, part-time employees to participate in 401(k) plans and making it easier for small businesses to offer retirement benefits to their employees.

2. Longer Distributions: The Secure Act 2.0 raises the age at which people must begin taking required minimum distributions (RMDs) from their retirement accounts, which provides individuals with more flexibility in managing their retirement savings.

3. Increased Tax Incentives: The Secure Act 2.0 includes tax incentives for employers who offer automatic enrollment and automatic escalation in their 401(k) plans. This could encourage more employers to offer these types of plans to their employees.

4. Increased Portability: The Secure Act 2.0 provides increased portability for retirement savings plans, making it easier for workers to take their retirement savings with them when they change jobs.

5. Potential Impacts On Estate Planning: The Secure Act 2.0 changes how retirement account assets are passed down to beneficiaries, which could have implications for estate planning.

By understanding the Secure Act 2.0, individuals and employers can take advantage of the opportunities it provides, and financial advisors can better advise their clients on the implications of these changes for their retirement savings.

Goals of the Secure Act 2.0

The purpose of the Secure Act 2.0 is to improve and enhance retirement security for American workers. The legislation aims to accomplish this by making it easier for workers to save for their future, providing increased access to retirement savings plans, and promoting greater retirement readiness.

Some specific goals of the Secure Act 2.0 include:

1. Encouraging automatic enrollment and automatic escalation in 401(k) plans, to help workers save more for retirement.

2. Expanding access to retirement savings plans, including allowing long-term, part-time employees to participate in 401(k) plans and making it easier for small businesses to offer retirement benefits.

3. Raising the age at which people must begin taking required minimum distributions (RMDs) from their retirement accounts to provide individuals with more flexibility in managing their retirement savings.

4. Providing increased portability for retirement savings plans, so workers can take their retirement savings with them when they change jobs.

5. Making changes to how retirement account assets are passed down to beneficiaries to support families in their retirement planning better.

By implementing these changes, the Secure Act 2.0 aims to help ensure American workers have the resources they need to live a secure and comfortable retirement.

Background of the Secure Act 2.0

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in the United States on December 20, 2019. The legislation was the first comprehensive retirement security bill passed in over a decade, and its primary aim was to make retirement more accessible and secure for American workers.

The SECURE Act was developed in response to several changes in the U.S. economy and workforce, including the decline in traditional pensions and the growth of the gig economy. The legislation was designed to address the retirement savings crisis by making it easier for workers to save for retirement and by improving the flexibility and portability of retirement benefits.

Since its passage, the SECURE Act has been praised for improving retirement security for American workers, and it has been widely seen as a step forward in addressing the retirement savings crisis. However, some critics argue that the legislation needs to go further in addressing the challenges faced by many workers who are not saving enough for retirement, and they call for further changes to be made to the retirement system.

The key provisions of the Secure Act 2.0 include:

1. Increasing Access To Workplace Retirement Plans: The Secure Act 2.0 seeks to increase access to workplace retirement plans by making it easier for small businesses to offer such plans to their employees.

2. Lifetime Income Options: The act proposes to encourage the use of annuities, which provide a guaranteed source of income for life, as a retirement savings option.

3. Long-Term Part-Time Worker Coverage: The act aims to provide long-term part-time workers with access to workplace retirement plans.

4. Expansion Of Tax Credits For Small Business Retirement Plans: The act proposes to expand tax credits for small businesses that offer retirement plans to their employees.

5. Protection Of Retirement Savings During Bankruptcy: The act aims to protect retirement savings during bankruptcy by giving retirement accounts the same protected status as other assets such as a person’s home.

6. Simplification Of Required Minimum Distributions (RMDs): The act proposes to simplify the rules surrounding required minimum distributions (RMDs), which are the minimum amounts that must be withdrawn from a retirement account each year.

7. Removal Of Age Restrictions On Contributions To Traditional IRAs: The act proposes to remove the age restrictions on contributions to traditional IRAs, allowing people to continue contributing to their traditional IRAs at any age.

Changes In Retirement Age

A. Increase In Required Minimum Distributions (RMDs) Age

Beginning January 1, 2023 individuals who own retirement accounts will be able to delay their mandatory withdrawal of deferred savings until they reach age 73. If you already scheduled an RMD for after 2022 and are turning 72 in 2021, the plan must remain as-is; however, those reaching 72 in or after 2023 should strongly consider updating or revising their plans. Additionally, Through SECURE 2.0 there has been an even more favorable change put into effect starting in 10 years, pushing the required start date back to 75.

B. Impact On Retirement Savings

The Secure Act 2.0, recently passed by Congress, is a comprehensive retirement package that will significantly impact how individuals save for and access their retirement funds. The bill’s main provisions include increasing the age at which retirees must begin taking distributions from traditional Individual Retirement Accounts (IRAs) to 72, allowing more people to contribute to tax-advantaged retirement accounts, and providing incentives for small business owners to set up retirement plans.

The increased age at which retirees must begin taking distributions from traditional IRAs could significantly impact their savings. Allowing people to delay taking distributions until they are 72 may allow them to leave more money invested in the account for a more extended period. This could lead to more money being available for retirement and higher returns on investment due to the longer-term investments that can be made in such accounts.

The increased ability to contribute to tax-advantaged retirement accounts is also likely to impact retirement savings. By allowing more people to contribute to retirement accounts and providing incentives for small business owners to set up such plans, more people will be able to save money for retirement. This could lead to more money available in retirement and potentially higher returns on investment due to the longer-term investments that can be made with tax-advantaged accounts.

C. Explanation Of The New Age Limit For Contributions

One of the provisions of the Secure Act 2.0 is an increase in the age limit for contributions to traditional Individual Retirement Accounts (IRAs). Prior to the Secure Act 2.0, individuals were required to stop making contributions to a traditional IRA once they reached age 70.5. The Secure Act 2.0 eliminates this age limit, allowing individuals to continue making contributions to a traditional IRA at any age as long as they have earned income.

This change is expected to positively impact retirement savings, as it will allow individuals to continue building their retirement nest egg even if they are still working at an advanced age. This could be particularly beneficial for individuals still earning income and have not yet saved enough for retirement or those who need to make up for lost time due to a career interruption.

The increased age limit for contributions to traditional IRAs is part of the Secure Act 2.0’s overall goal of improving retirement security for Americans and providing more opportunities for individuals to save for their future. By allowing individuals to continue contributing to a traditional IRA at any age, the Secure Act 2.0 helps to ensure that more Americans have access to tax-advantaged savings vehicles and are better prepared for retirement.

Effects On Small Businesses

A. Incentives For Small Businesses To Offer Retirement Plans

Starting in 2025, 401(k) and 403 (b) plans must enroll eligible participants automatically unless they choose to opt-out. Small businesses with ten or fewer employees and new companies less than three years old will be exempt from this requirement. This expansion of automatic enrollment provides an excellent opportunity for many individuals – particularly those who are younger and make a lower salary – to start saving early for retirement.

Starting in 2024, employers who do not already offer a retirement plan can allow their employees to start saving for later life by offering a starter 401(k) or safe harbor 403(b). Benefits of these plans include access to generous annual deferral limits and no employer requirement to match contributions. This is excellent news for small businesses that may have previously struggled with providing adequate savings options for their staff – now even new ventures can provide something essential.

By 2025, part-time workers who have worked over 500 hours per year for two consecutive years will finally be able to participate in their employer’s retirement plans. This monumental change is particularly significant now as the workforce continues its gradual transition towards more limited hours of employment and provides an essential pathway for financial security when one’s working life comes to a close.

B. Expansion Of Multiple Employer Plans (MEPS)

The Secure Act 2.0 expands the use of Multiple Employer Plans (MEPS), which are workplace retirement plans that multiple employers sponsor. MEPS allow small businesses to pool resources and provide retirement benefits to their employees through a single plan, which can be more cost-effective and administratively feasible than offering individual plans.

Under the Secure Act 2.0, small businesses can participate in MEPS more efficiently, as the law makes it easier for unrelated employers to join the same plan. This could result in greater access to workplace retirement benefits for small business employees and make it easier for small businesses to offer these benefits to their employees.

It’s important to note that the impact of the MEPS expansion will depend on various factors, such as the interest of small businesses in participating in MEPS and the availability of suitable plans. However, the expansion of MEPS is expected to positively impact retirement savings for Americans, particularly those who work for small businesses.

C. New Tax Credits For Small Businesses To Set Up Retirement Plans

The Security Act 2.0 initiative increased the startup tax credit available to qualifying small employers, which would cover up to 100% of administrative costs up to $5,000 for the first three years of plans established by businesses with up to 50 employees. This is an increase from the previous 50% covered under the original SECURE Act.

This proposed increase in the startup tax credit could provide significant benefits to small business operators who are looking to start their operations, offering them much-needed financial assistance during the initial stages when they often lack sufficient funds and resources. Moreover, it could help create new employment opportunities across industries as more people are hired in response to increased demand from smaller businesses that are able to take advantage of this incentive offered by SECURE 2.0.

Overall, this proposed change in the startup credit could play a vital role in helping businesses grow and develop while contributing positively towards economic growth at a local level.

Changes In Inheritance Rules

A. New Rules For Inherited IRAs

The Secure Act 2.0 includes changes to the rules for inherited Individual Retirement Accounts (IRAs). The previous rules allowed non-spouse beneficiaries to stretch out distributions from an inherited IRA over their lifetimes, potentially allowing the account to grow tax-free for many years.

Under the Secure Act 2.0, non-spouse beneficiaries generally must withdraw all the funds from an inherited IRA within ten years of the original account holder’s death. This change is designed to reduce the time that funds are held in tax-deferred accounts and increase the tax revenue generated by inherited IRAs.

B. Explanation Of The “Stretch IRAs” Provision

The “Stretch IRAs” provision in the Secure Act 2.0 refers to changes in the rules regarding Inherited Individual Retirement Accounts (IRAs). Under previous law, non-spousal beneficiaries of IRAs could “stretch” distributions from the inherited IRA over their lifetime, allowing the tax-deferred growth of the account to continue for many years.

However, the Secure Act 2.0 changes this by requiring most non-spousal beneficiaries to empty the inherited IRA within ten years of the original account holder’s death. This means that the entire balance of the inherited IRA must be withdrawn and taxed as income within ten years, rather than being able to spread it out over the beneficiary’s lifetime.

Exceptions to this rule include some beneficiaries who are disabled, chronically ill, or not more than ten years younger than the original account holder. These beneficiaries can still take distributions over their lifetime.

The purpose of the Stretch IRAs provision in the Secure Act 2.0 is to increase tax revenue for the government and reduce the tax-deferred growth of inherited IRAs. The change is expected to impact estate planning strategies significantly, and individuals may need to reconsider their plans for passing on IRAs to their beneficiaries.

C. Impact On Beneficiaries

The new rules for inherited IRAs have significant implications for individuals and their beneficiaries. For individuals, it means that they need to consider the impact of the Secure Act 2.0 on their estate planning and consider alternative strategies, such as naming a spouse as the primary beneficiary, to minimize the tax implications of an inherited IRA.

For beneficiaries, it means they need to be prepared to withdraw all the funds from an inherited IRA within 10 years, which could have significant tax implications and impact their financial planning. It’s important to note that the rules for inherited IRAs apply only to IRAs that are inherited after December 31, 2019, and that there are some exceptions for certain types of beneficiaries, such as disabled individuals, minor children, and beneficiaries who are not more than 10 years younger than the original account holder.

Overall, the new rules for inherited IRAs are part of the Secure Act 2.0’s overall goal of improving the efficiency of the retirement system and reducing the amount of time that funds are held in tax-deferred accounts. The impact of these changes on individuals and their beneficiaries will depend on various factors, such as their specific circumstances and financial planning strategies.

Impact On Retirement Planning

A. Explanation Of How Secure Act 2.0 Affects Retirement Planning

The Secure Act 2.0 makes significant changes to retirement savings and planning. Here are some key changes in the SECURE Act 2.0 that affect retirement planning:

1. Raised Age For Required Minimum Distributions (RMDs): The age at which individuals must begin taking RMDs from their tax-deferred retirement accounts has been increased from 70.5 to 72.

2. Expansion Of 401(k) Eligibility: The SECURE Act 2.0 expands eligibility for 401(k) plans to part-time workers who have worked at least 500 hours per year for three consecutive years.

3. Increased Credit For Small Employers to Offer Retirement Plans: The SECURE Act 2.0 increases the tax credit for small employers who start a new retirement plan or add automatic enrollment to their existing plan.

4. Long-Term Part-Time Workers Eligible For Pension Benefits: The SECURE Act 2.0 requires pension plans to include long-term part-time workers who have worked at least 500 hours per year for three consecutive years.

5. Encouragement Of Annuities In Retirement Plans: The SECURE Act 2.0 encourages the use of annuities in employer-sponsored retirement plans by providing safe harbor protection for plan fiduciaries who select annuity providers. Expansion of 529 College Savings Plans: The SECURE Act 2.0 expands the use of 529 College Savings Plans to cover apprenticeships, student loan repayments, and homeschooling expenses.

Overall, the SECURE Act 2.0 aims to improve access to retirement savings plans, increase the flexibility of those plans, and promote greater financial security for American workers in retirement. However, the changes may also have implications for individual retirement planning strategies, so it’s important to consult with a financial advisor to determine how the new law may affect your circumstances.

Should You Seek Professional Financial Advice About the Secure Act 2.0?

Seeking professional financial advice is crucial for individuals who want to understand the impact of these changes on their retirement plans and make informed decisions about their retirement savings. A knowledge estate planning attorney like Joel A. Harris should be your first call. Along with a financial advisor, Joel will help guide your decisions on protecting your estate.

A competent estate planning attorney, along with a financial advisor, can provide guidance on the latest laws and regulations related to retirement savings, and they can take into account an individual’s unique circumstances to provide personalized guidance. They can help determine the best strategies for maximizing retirement savings and avoiding costly mistakes, such as taking distributions too early or making investment decisions that are not in the individual’s best interest.

Additionally, financial advisors can help individuals understand the potential trade-offs associated with the changes brought by the Secure Act 2.0, such as changes to required minimum distributions or the expansion of 401(k) eligibility.

Your Next Steps: Prepare For The Changes Brought By SECURE Act 2.0.

The SECURE Act 2.0 is a significant piece of legislation that could greatly impact retirement planning. Here are a few steps you can take to prepare for these changes:

1. Review Your Retirement Savings: Take a look at your current retirement savings and investments to see if they align with your retirement goals. Consider adjusting your savings strategy to maximize your benefits under the new law.

2. Assess Your Retirement Plan Options: The SECURE Act 2.0 introduces new options for retirement plans, such as multi-employer plans and open multiple-employer plans. Consider whether these options could be a good fit for you and your retirement goals.

3. Talk To Financial Advisor: A competent financial advisor can help you navigate the changes brought about by the SECURE Act 2.0 and provide personalized advice on how to prepare for them.

4. Consider A Roth Conversion: The SECURE Act 2.0 eliminates the age limit for contributions to traditional IRAs, but it also raises the age for required minimum distributions. If you’re over 70 1/2, consider converting some of your traditional IRA savings to a Roth IRA, which has no required minimum distributions.

5. Talk To An Estate Planning Attorney: Talk To An Estate Planning Attorney: The SECURE Act 2.0 changes the way inherited IRAs are taxed, so it’s a good idea to review your estate plan to see if any changes are needed to align with the new law. For this reason and more it is usually best never to name a trust as a retirement plan beneficiary without first discussing the designation with your attorney.

Remember, the earlier you start preparing for the changes brought by the SECURE Act 2.0, the better positioned you’ll be to achieve your retirement goals.