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The SECURE Act 2.0: a Primer

Stocks rallied in January as moderating inflation and healthy economic data put investors in a buying mood. The Dow Jones Industrial Average rose by 2.83 percent, the Standard & Poor’s 500 Index jumped by 6.18 percent, and the Nasdaq Composite vaulted by 10.68 percent to end the month. 

In other positive news, inflation is continuing to ease, however slightly, with this Tuesday’s inflation report showing the consumer-price index moved to 6.4 percent in January following a 6.5 percent read in December. Earlier this month, the US Labor Department reported an unemployment rate of 3.4 percent for January, its lowest level since May 1969. Consumer spending on dining out, travel and personal care are also holding strong, despite signs of cooling in home buying. 

While all this good news brings signs of hope for markets in 2023, it also means the Federal Reserve may not be done raising interest rates to combat inflation. Charter Oak's advisors will be watching closely when the Federal Reserve next meets in late March. 

SECURE Act 2.0

In the final days of 2022, Congress passed a new set of retirement rules called SECURE 2.0, a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019. The sweeping legislation has dozens of significant provisions, so to help you see what changes may affect you, we divided the major provisions into three sections.

1. New Distribution Rules

Required Minimum Distribution (“RMD”) age will rise to 73 in 2023. One of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). 

  • If you have already turned 72, you must continue taking distributions
  • If you are turning 72 in years 2023 through 2033 (born from 1951 to 1959) your RMD starting age is 73
  • Anyone born in 1960 or later will start RMDs at age 75

Access to funds. Workplace retirement plan participants can use retirement funds in an emergency without penalty or fees. Starting in 2024, an employee can get up to $1,000 from a retirement account for personal or family emergencies, and other emergency provisions exist for terminal illnesses and other special circumstances.

Reduced penalty. Also, starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake promptly, the penalty may drop to 10%.

2. New Accumulation Rules

Catch-Up Contributions. Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually.

Automatic Enrollment. Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. However, employees can choose to opt-out.

Student Loan Matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.

3. Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, individuals can roll a portion of a 529 education savings plan into a Roth IRA. So, if your child gets a scholarship, goes to a less expensive school, or doesn't have a need for the funds, the money can be repositioned into a retirement account. 

SIMPLE and SEP. From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth Individual Retirement Account (IRA) rules. From 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.

The are many other provisions of SECURE Act 2.0 that Charter Oak’s advisors are familiarizing ourselves with, and we welcome discussions and questions about this new law and how it relates to our clients’ specific situations. 

As always, it is a pleasure and a privilege to serve you and we wish you an enjoyable month of February, spring is just around the corner!