Introduction
The SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement) is a bill passed by the U.S. Congress in December 2021. It builds upon and expands the provisions of the original SECURE Act (passed in December 2019) and includes changes to retirement savings rules, including catch-up contributions, employer plan requirements, and provisions aimed at increasing access to retirement savings plans for small business employees.
The Secure Act 2.0 impacted contribution limits for many different retirement accounts and plans. Here are some of the major changes:
1) Traditional & Roth IRAs
For traditional and Roth IRAs, if you’re over age 50, you can squirrel away an additional $1,000 each year. Starting in 2024, the $1,000 catch-up will be annually adjusted for inflation, rounded down to the nearest $100 increase.
2) SIMPLE IRAs
For SIMPLE IRAs, the catch-up contribution limits for those age 50 or greater were increased to $3,500 for 2023, up from $3,000 in 2022.
3) 401(k) Plan & Similar Plans
For 401(k) plans and other similar employer-sponsored plans, the catch-up contribution limit for people age 50+ has been increased from $6,500 to $7,500 for 2023.
4) New Feature for SEP & SIMPLE IRAs
Another major change for SEP and SIMPLE IRAs is the ability to make Roth contributions. Roth contributions allow you to pay taxes now and avoid taxes on the growth. This is different than a pre-tax contribution, which gives you a deduction today but requires you to pay taxes later when you make distributions. The ability to make Roth contributions can significantly help low to middle income workers and business owners or people that will be in a lower tax bracket in retirement.
5) Roth Employer Matches
The Secure Act 2.0 also gave an option for employers who match their employees contributions into Roth accounts. These matches would be taxable as income to the employee. Again, this could be a great benefit to people who expect their tax bracket to be lower in retirement or when they plan on taking distributions from their account.
6) The “Reverse Donut Hole”
Effective 2025, if you turn 60, 61, 62, or 63 during the year, you get to contribute even more. This is like a “reverse donut hole.” For 401(k) or similar plans, you can make increased catch-up contributions of $10,000 or 150% of the applicable catch-up limit from the prior year (whichever is greater). For SIMPLE plans, you can contribute $5,000 or 150% of the applicable catch-up limit for the current year (whichever is greater).
7) High-Earners’ “Rothification”
Starting in 2024, high-earners will be required to use a Roth option for catch-up contributions for retirement plans except for SIMPLE IRAs. While the changes allow people to contribute more, this change will force high-earners to pay more tax today for the ability to do so, potentially when they are in a higher tax bracket than what they might be in retirement. The Secure Act 2.0 defines high-earners as anyone whose wages are greater than $145,000 for the prior year that they were with their employer.
Conclusion
There are many changes and tax planning decisions to make due to the SECURE ACT 2.0.
Make sure to check out our Free Resources section, which includes a free checklist, “What important issues should I consider regarding changes made by the SECURE Act 2.0?”
If you still have questions, please feel free to contact us at info@swadwealth.com.
Meet the Contributor
Zack Swad is a fee-only financial planner located in Santa Rosa, CA serving clients locally and across the country (virtually).
He specializes in financial planning and retirement planning for people age 50+. As a fee-only, fiduciary, and independent financial advisor, Zack Swad is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice. He has been in the finance industry for over 11 years. He previously worked for a Fortune 500 Financial Services company, managing a practice of $800 million for 300 clients. Zack then went on to build his own firm, Swad Wealth Management, LLC so he could make a deeper impact in his client’s lives. In his free time, Zack enjoys spending time with his wife Elise, playing board games, piano, and singing.
Zack Swad’s Contact Information:
Email – zack@swadwealth.com
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Sources for Article:
Risk-Return Tradeoff Definition
How to Teach Your Child About Investing
Wisdom of Great Investors – Quotes | Davis ETFs
Disclosures:
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Swad Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Swad Wealth Management, LLC or performance returns of any Swad Wealth Management, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this article constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Swad Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
