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Herman Freitag, CFP® Feb 24, 2023 9:38:36 AM 5 min read

SECURE Act 2.0 for Small Business Owners and Retirees

The SECURE Act 2.0 was officially signed into law on December 29th, 2022.

Within the new legislation, there are several major changes that may impact your current financial planning strategy. Here are some highlighted major changes we suggest you be aware of:

Required Minimum Distributions: You are now able to wait until age 73 to begin drawing from your IRA. For those born after 1960, you can wait until age 75! These changes open the door for further planning around strategic Roth conversions as well as tax bracket optimization in retirement.

401k Plans: There have been several changes made to how much and how one can contribute to their 401k plans.

First and foremost, Congress has now indexed catch-up contributions to inflation, as well as created a second enhanced catch-up for individuals ages 60-63. Starting in 2024 catch-up contributions will be indexed to inflation and beginning in 2025 those individuals ages 60-63 will be able to contribute an additional $10,000 or 150% of the normal catch-up amount, whichever is higher. This both increases your ability to contribute and automates the process of those limits increasing over time.

Secondly, starting in 2024, catch-up contributions must be made as Roth contributions for high earners. Almost every doctor will fall into the “high earner” category, with its threshold set at $145,000. This necessitates a re-examining of the 401k plan documents and payroll structure to ensure your plan is set up properly to begin making such contributions in 2024.

Additionally, employer matches and safe harbor contributions will have the option to be made as Roth contributions moving forward. Note that the employee bears the tax burden for these contributions as if they were income, should you choose to allow them.

For those starting a new plan in 2023, the tax credits for starting a new 401k have been significantly expanded from previous thresholds meaning you have more incentive than ever to do so! However, an important addition for new plans is a requirement that any plan of a certain size automatically enroll participants. Staff can decline enrollment, but plan sponsors will need to be mindful of these changes and position appropriately.

Qualified Charitable Distributions: Distributions from your IRA directly to charities are subject to several changes, and the maximum contribution is now changed from a static $100,000 to an inflation-indexed amount. It is interesting to observe that Congress has once again left the age at which one can begin qualified distributions at 70 ½, rather than tie it to the pushed-back RMD ages.

529 Plans: One can now utilize funds from a 529 plan to fund a child’s annual Roth IRA contributions up to $35,000 across their lifetime. It is important to note that while these transfers do not require the owner to have earned income, they do take the place of a Roth contribution for that year, so while it is an effective way to disburse excess 529 plan dollars, it does not allow for additional dollars to be added to a Roth IRA.

Simple IRAs: The IRS has now made it easier to exit a Simple IRA and implement a 401k. Previously this had to be done at year-end, but now one can make this change during the year as well, which means many owners who were tethered to calendar year restrictions in their Simple IRA can now look at optimizing their retirement plan throughout the year. Additionally, for those choosing to maintain a Simple IRA, the new law grants similar expanded catch-up contribution thresholds for those accounts as well.

Lastly, there is good news for IRAs and Roth IRAs also! The catch-up contributions for IRAs have now been indexed to inflation starting in 2024. Previously these contributions had been a static $1,000 for many years; indexing to inflations should add a much-needed boost to the contribution thresholds over time.

While the impact of SECURE Act 2.0 is still being understood, we remain dedicated to bringing forth the key changes impacting our clients. Stay tuned for more information and consult with your advisor if you believe these items warrant action on your behalf.



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Herman Freitag, CFP®

Herman is a Wealth Advisor with CI Brightworth. He graduated with a degree in Marketing and a master's degree in Business Administration from the University of New Orleans.