SECURE 2.0: Top 5 items to discuss with your clients

The new SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement Act) seeks to make it easier for U.S. taxpayers to save for retirement and expands access to retirement plans. That’s a good thing.

But as with virtually everything written by politicians and lawyers, figuring out which parts of the new bill are relevant for you or your clients can be a daunting task. However, just because something looks complicated does not mean it’s not worth diving in deeper to examine which changes could benefit you, your clients, and your business. That’s what we are going to do in this blog.

It’s true that many of the changes in SECURE 2.0 are more specific to the mechanics and logistical side of how retirement plans work, and a few items are more specific to a subset of the population and therefore have limited impact or benefit to many investors. What we have sought to do here is focus on the “Top 5” changes in the act that we see being most relevant to financial advisors and their clients. We have summarized what each of these five changes are and why you may want to discuss these particular points with your clients.

Here are the highlights of SECURE 2.0:

1. Delayed Required Minimum Distributions (RMDs)

SECURE 2.0 has increased the age at which individuals must begin taking RMDs from a retirement plan or individual retirement account. This change will allow investors to continue earning tax-deferred returns within their retirement vehicle for a longer time. This is particularly beneficial for investors you may be working with who don’t need the additional cashflow when they hit age 72. They will no longer need to take unnecessary distributions earlier than desired and forgo the potential for continued tax-deferred growth.

Prior to January 1, 2020, an individual was required to begin receiving RMDs by age
70 ½. From 2020 until the start of this year, the RMD age was 72. For 2023, the minimum age requirement to begin RMDs has increased to 73. And in 2033, RMD age requirements will increase again to 75.

This is an important topic to include in your conversations with clients entering their 70s.

2. Lower RMD penalties

The penalty for failing to take an RMD has become less punitive: rather than being taxed at 50% on the amount of RMD not taken, investors will only have a 25% tax applied to the amount not withdrawn. The penalty is further reduced to 10% if the account owner withdraws necessary amounts and files a return reflecting the tax during a statutory correction period.

Although the penalty is less severe, ensuring you have a repeatable process for client RMDs in your practice is essential to protect your clients from future penalties.

3. Increased catch-up contributions

Many investors struggle to save enough early in their lives and too often are trying to catch up to put more dollars into their plans later in their employment lifecycle. Currently, workers who are age 50 or older are eligible to make “catch-up” contributions, up to inflation-adjusted limits. These limits will be increased beginning in 2025, meaning they can now bolster their retirement account in a more fulsome manner than before.

For defined contribution plans (other than SIMPLE plans), the limit on catch-up contributions for individuals aged 60-63 will be the greater of (i) $10,000 or (ii) 150% of the regular catch-up amount for 2024, indexed for inflation.

Catch up contributions for SIMPLE plans will also be increased but are subject to lower limits. Catch up contributions for IRAs, which are currently subject to a flat $1,000 for those over 50, will be indexed for inflation starting in 2024. 

However, 401(k)s, 403(b)s and 457(b)s are treated differently. Beginning in 2024, catch-up contributions for these plans by employees whose wages exceed $145,000 (indexed for inflation) must be made in a Roth account. The intent of this after-tax treatment is to raise revenue, offsetting some of the costs of SECURE 2.0.

Understanding the nuances of the catch-up contribution changes will enable you to help your clients save needed funds and to continue to grow their wealth long term. Consider reviewing which of your clients aged 50 and older may benefit from the increases in catch-up contribution allowances.

4. 529 plan rollovers

If you are managing 529 plans, there are changes in the rollover provision starting in 2024. Assets held in a Section 529 qualified tuition program account maintained for at least 15 years can be directly rolled over on a tax-free basis to a Roth IRA established for the benefit of the beneficiary.

The rollover is subject to the annual limits on the dollar amount of Roth IRA contributions and subject to a lifetime limit of $35,000. Further, the amount of a rollover must not exceed the aggregate amount contributed (and earnings) before the five-year period ending on the date of distribution (in other words, no contributions made in the prior five years are eligible for rollover).

Now may be the time to review your clients’ 529 plan accounts that have been in existence for at least 15 years to determine what option is best for the client and designated beneficiary.

5. Expansion of automatic enrollments

Sometimes, when employees join a firm, they miss the notifications or don’t fully understand what these defined contribution plans are and how they can benefit from them. To help employees participate and fully take advantage of their plan, all newly established 401(k) and 403(b) plans must automatically enroll eligible employees at a contribution rate of at least 3%, starting in 2025. The contribution percentage must automatically increase by 1% each year until the contribution is at least 10%, but no more than 15%. There are limited exceptions for plans sponsored by new and small businesses, and for government and church plans. As is currently the case, participants will still have the right to opt out of participating in their employer-sponsored plan.

Set a reminder for yourself at the end of 2024 to have conversations with clients who are joining or working for companies with newly established plans that fall under the purview of the expanded automatic enrollment policy. Clients are likely to appreciate your expertise in helping them evaluate their plan options. 

Final thoughts

Some provisions in SECURE 2.0 may be beneficial for the work you do with clients to help them grow their assets and keep more of what they earn also after taxes. Think about how to approach your clients and prospects with some of these helpful tips for them. Catch-up contributions are potentially especially useful for those who have put off saving for retirement—or those who have excess disposable income they want to grow tax-deferred in a retirement plan.

Speaking of retirement, the changes in the RMD age and RMD penalties is valuable information for your clients who are over age 70. Give thought to how your guidance can help with clients’ investment planning. And lastly, the auto-enrollment into defined contribution accounts is an important retirement savings tool. This is a good topic of discussion for your younger clients. Don’t discount the impact that sharing this information with older clients could also have—particularly those with children or grandchildren who may be affected by the change in policy. You never know when your financial planning insights passed on by Mom, Dad or grandparents can result in a valuable generational referral for you.

What matters now is what you choose to do with the possibilities offered by SECURE 2.0. Consider using these five insights as conversation starters with your clients as you solidify the key role you play in providing them with long-term financial planning and advice.