In late December of 2022, President Biden signed the Consolidated Appropriations Act, 2023 – a bill which included the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0.
The goal of the SECURE Act 2.0 is to increase tax-efficient retirement savings and charitable donations for Americans. It brings with it a host of changes that will impact the way financial advisors work with their clients going forward, including opening up the opportunity to expand their books of business.
According to Broadridge, the new retirement reform will allow millions of Americans to invest in a 401(k) for the first time, increase the amount they currently set aside, or catch up their retirement savings in pursuit of their goals. Additionally, small business owners are being offered more incentives than ever to start plans for their employees.
For financial advisors, taking advantage of these opportunities requires an understanding of the regulations outlined in the new Act. Here are the top five changes financial advisors need to know:
- Expansion of Required Minimum Distributions (RMDs): The age at which individuals must start taking RMDs has increased from 72 to 73, and in 10 years, it will increase again to 75. This will affect the timing of retirement withdrawals for many clients, and financial advisors will need to adjust their retirement income projections accordingly.
- Increased Catch-Up Contributions: According to the new Act, additional contributions to retirement plans are allowed for individuals 50 and older. For 401(k) and other employee-sponsored plans, these individuals can make additional catch-up contributions of $7500, a number that will increase with inflation in years to come.
- Changes to Qualified Charitable Distributions (QCDs): Prior to SECURE 2.0, individuals 70 ½ and older were able to contribute $100K directly from an IRA to a qualified charity without recognizing any income on the donated amount. Now, this number will be indexed for inflation. Additionally, a one-time QCD of up to $50K from an IRA to a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust that benefits the participant or their spouse is now also permissible. This creates an opportunity for financial advisors to revisit their clients’ charitable giving strategies.
- Retirement Plan Auto-Enrollment: Advisors working with small business owners, pay attention. In 2025, 401(k) and 403(b) plans will be required to automatically enroll eligible participants who do not opt out of coverage. The goal of this change is to encourage more workers to save for retirement, especially those who are lower paid. Exceptions apply to small businesses with less than 10 employees, as well as businesses less than 3 years old.
- Introduction of Starter 401(k) Plans: Related to point number four, the new Act also permits employers that do not already offer retirement plans to provide starter 401(k) or safe harbor 403(b) plans to eligible employees. Employers aren’t required to match contributions, so this is an excellent point of entry for smaller businesses that want to help their employees secure their financial futures, but don’t have the capital to contribute themselves.
SECURE Act 2.0 will bring significant changes to the retirement landscape, and with those changes come opportunities for advisors to guide their clients through retirement-related decisions.