One of the last acts of Congress in 2022 was the Secure Act 2.0, also known as the Securing a Strong Retirement Act of 2022. This legislation is aimed at strengthening the retirement system and bolstering Americans’ financial readiness for retirement.

The highlights include increasing the age at which required minimum distributions (RMDs) must begin from IRA and 401(k) accounts and changes to the size of catch-up contributions. Additional changes allow people to save for emergencies within retirement accounts, enable easier retirement account movement from employer to employer and help younger people save while paying off student debt. Some of the changes are effective immediately, and others will begin over the next few years.

Below are some of the most important changes:

Raising the Starting Age for RMDs 

• On Jan. 1, the threshold age that determines when individuals must begin taking RMDs from traditional IRAs and 401(k)s increased from 72 to 73. Individuals will have an additional year to delay taking a mandatory withdrawal. If you turned 72 in 2022 or earlier, you must continue taking your RMD as scheduled. If you are turning 72 in 2023 and have already scheduled a withdrawal, we need to discuss updating the withdrawal plan. 

• In 2033, the RMD age will increase again from 73 to 75.

• Starting this year, the penalty for failing to take an RMD decreases from 50% to 25% of the RMD amount not taken. This will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount not taken and submits a corrected tax return in a timely manner.

• Roth accounts in employer-sponsored retirement plans will be exempt from RMDs starting in 2024.

Expanded Roth Rules 

• Small business owners can now open and contribute to Roth SIMPLE IRAs and Roth SEP IRAs.

• Employers can match employee retirement plan contributions in their Roth accounts.Previously, matching in employer-sponsored plans was made on a pre-tax basis.Contributions to a Roth retirement plan are made after taxes, allowing earnings to grow tax-free. 

Higher Catch-Up Contributions 

• For 2024, the IRA catch-up contribution limit will be indexed to inflation, allowing it to increase every year, instead of a constant $1,000 extra per year for those over 50.

• Starting Jan. 1, 2025, individuals who are 60 to 63 can make catch-up contributions to a workplace plan up to $10,000 annually, and that amount will be indexed for inflation. The catch-up amount for people 50 and older this year is $7,500.

• One caveat to the rule is that for those who earn more than $145,000 in the prior year, all catch-up contributions at age 50 and older will need to be made into a Roth account in after-tax dollars. 

New Rules for Qualified Charitable Distributions (QCDs)

• Under current law, individuals who are 70½ and older can direct up to $100,000 in distributions per year from a traditional IRA to a qualified charitable organization. Effective in 2024, a new provision will allow the maximum contribution to increase based on inflation.

• In addition, beginning this year, individuals have a one-time opportunity to use a QCD to fund a charitable remainder unit trust, charitable remainder annuity trust or a charitable gift annuity. This amount will count towards the annual RMD. 

529 Plan Updates

• After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000.

Changes for Those Who Are Farther from Retirement

• Automatic enrollment and portability: In 2025, businesses adopting new 401(k) and 403(b) plans are required to automatically enroll eligible employees with a contribution rate of at least 3%. This also allows service providers to offer automatic portability for those employees with low balances to a new plan when they change jobs. Currently, lower-balance savers typically cash out their retirement plans when they leave jobs.

• Emergency savings: Defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account. Employees can contribute up to $2,500 annually, and the first four withdrawals in a year would be tax- and penalty-free. An emergency savings fund could encourage participants to save for short-term and unexpected expenses.

• Student loan debt: Starting this year, employers will be able to match employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off student loans.

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Overall, the SECURE 2.0 Act provides increased opportunities to save for retirement, but everyone’s financial situation is different. As always, we encourage you to consult with your financial advisor or tax professional to further understand how SECURE 2.0 changes may apply to you and your situation.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter.  In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Fidelity, KIM

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

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