By Matthew Gaude & Shawn McGuire
The SECURE Act is the common name for the “Setting Every Community Up for Retirement Enhancement” Act and was signed into law in 2019. The original SECURE Act increased the age for required minimum distributions and eliminated the age requirements for traditional IRA contributions.
The SECURE Act 2.0 is the follow-up law and includes provisions for expanding the options for retirement savings especially for low-income earners and part-time workers. It also attempted to reduce the complexity of current retirement plan rules.
It’s worthwhile to pay attention to SECURE 2.0 and what it means for you and your retirement strategy.
Retirement Plan Contributions
You know that to have the maximum amount of money for your retirement years, you need to contribute money into your retirement plan throughout your working years. However, this takes planning since the IRS caps how much you can invest in your 401(k) each year.
A Roth IRA is a specific type of individual retirement account. You contribute after-tax dollars to this type of account. The overall benefit of a Roth IRA is that the contributions and any earnings on those contributions grow tax-free and can be withdrawn tax-free after the age of 59½ as long as the account has been open for at least five years.
The maximum contribution limit for Roth and traditional IRAs for 2023 is:
- $6,500 if you’re younger than age 50
- $7,500 if you’re age 50 or older
A traditional IRA is funded by pre-tax dollars. There are no taxes assessed on this type of account until you withdraw from it at age 55½ or older.
Roth Contributions Under SECURE 2.0
Roth IRAs are individual retirement accounts allowing you to contribute into it with after-tax dollars up to a certain amount each year. One of the biggest benefits of this type of account is that the earnings and any withdrawals after age 59½ are not taxed, thus allowing you to save money during retirement.
For many American workers, employer-sponsored retirement savings plans are their only source of retirement savings. But many of us don’t take advantage of them by enrolling in automatic deposits.
SECURE Act 2.0 is making enrollment in 401(k) plans automatic as of 2025. These contributions will take 3% of an employee’s salary and will increase by 1 percent annually until it reaches 10%. Employees must actively opt out of automatic enrollment if they don’t wish to take part.
Many people believe this mandate is needed and will help Americans build a more stable future than they would have otherwise. It’s easy to have a shorter-range lens and want to take home your full paycheck than put some percentage away for the future. So SECURE 2.0 provides a lower barrier to entry for many Americans.
Small businesses with 10 or fewer employees, government plans, church plans, and new businesses that are less than three years old are exempt from the auto-enrollment policy.
Catch-up Contributions Under Secure 2.0
The general school of thought is to save 10 to 15 percent of your pre-tax income for your retirement. The hard truth is that saving in that range is difficult in the early part of your career or for lower-income earners. For these reasons, catch-up contributions are available to people aged 50 and older. They can make a real difference in being prepared for retirement or struggling through it.
98% of all 401(k) plans allow catch-up contributions. Unfortunately, only 16% of employees utilize them as an option. The rule states that employees must first reach the plan’s contribution limit before making any catch-up contributions. Another advantage of catch-up contributions is they lower your tax burden as you contribute more.
Starting in 2024, if you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement. SECURE 2.0 increases catch-up contributions in 2025 for 401(k), 403(b), governmental plans, and IRA account holders. The law affects wages so self-employment income does not qualify here. So, if you are a partner or highly compensated sole proprietor, your income would not be considered under this act.
In the past, workers had the choice to make catch-up contributions on a pre-tax and/or Roth basis. However, SECURE 2.0 states they must be made on a Roth basis.
Since you’re putting those extra contribution amounts as Roth contributions, you will probably see a higher tax bill than you’re used to. These contributions will not reduce your current taxable income since they will be made with after-tax dollars; however, they can be withdrawn tax-free in the future.
Matching for Roth Accounts
Effective for 2023, employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts (although it may take time for plan providers to offer this and for payroll systems to be updated). Previously, matching in employer-sponsored plans was made on a pre-tax basis which means participants had to pay taxes when they withdraw the money in retirement. Contributions to a Roth retirement plan are made after tax, after which earnings can grow tax-free. This could be a big benefit for employees that can now contribute to Roth 401K’s AND receive their employer match to their Roth 401K and receive all of their income tax-free from their 401K’s in retirement.
How We Can Help
No one said it was easy to navigate the changing terrain of retirement and tax laws. But at Live Oak Wealth Management, it’s our job. We understand the ins and outs of SECURE 2.0 and what it all means for your individual situation.
If you’d like to meet with us for a free consultation and see how we can help you, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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