What the SECURE Act 2.0 means to you
By Eric Reich
There has been a lot of hype lately surrounding a bill passed just before Christmas, and for good reason. It was a gift for us all. There are many enhancements to the original SECURE Act, and in this issue I thought I would summarize what they mean for you and your money.
I know I should save the best for last, but sometimes you want dessert before dinner. This provision is huge for many investors and officially eliminates the biggest objection people have to investing in a 529 plan, which is “what do I do if my kid doesn’t use all the money for college?” Prior to this change, distributions from a 529 plan that weren’t used for a qualified higher education expense were assessed a 10% penalty on the interest earned. This should in no way be a deterrent for almost anyone to invest into a 529 plan because the argument is still very easy to make that you would still come out ahead even with the potential penalty, but now it’s a no-brainer. You can now roll over unused 529 plan funds into your Roth IRA. This allows you to continue to build tax deferred growth and typically tax free distributions. This is the best tax gift for investors in a very long time.
Speaking of Roth IRAs, you can now make Roth contributions to a SEP or SIMPLE Plan. This was previously not allowed and opens up even more opportunities for tax deferred growth and typically tax-free distributions. If you’re over age 50 you can make “catch up” contributions to both of these plans. Now, all catch up contributions must be to a Roth account starting in 2024. Employer contributions to 401(k) plans were previously required to be into a traditional account even if all of your contributions went into a Roth. Effective immediately, those employer matches can also be made to a Roth.
Catch up contributions will index for inflation beginning in 2024 but will also index further for those ages 60-63.
There are also new exceptions to the 10% penalty (taxes as still assessed) to early distributions as well. These include distributions for domestic abuse, terminal illness, and disaster relief.
SIMPLE IRA plans will allow employees to defer even more of their income starting next year and employee matches will be allowed to increase as well.
Missed required minimum distribution (RMD) penalties have always seemed excessively harsh at 50% of the amount of the RMD missed. Those penalties have now been reduced to 25%, and better yet, if you correct your mistake quickly it can be further reduced down to only 10%.
Qualified Charitable Distributions (QCDs) are a great way to give to charity if you are over age 70 and a half. The law allows you to gift up to $100,000 and it counts against your RMD. Starting in 2024 that number will index with inflation and will also be expanded to include a one time additional $50,000 contribution to a charitable remainder trust.
RMD age increase will immediately be raised to age 73 and will ultimately rise to age 75 over the next 10 years.
These changes add up to a lot of great choices for investors moving forward. Just be mindful of when each different rule goes into effect as they are not all available immediately. Talk to your tax advisor for further guidance.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. 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. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations. A lifelong resident of Cape May County, Eric resides in Seaville, NJ with his wife Chrissy and their sons ,CJ and Cooper, and daughter Riley.
