Secure Act 2.0

The SECURE Act 2.0 was signed into law on December 29,2022 as part of the Consolidations Appropriations Act of 2023 as a follow-up bill to the original SECURE Act passed in 2019. The Act includes provisions to expand participation in retirement plans and promote retirement savings for Americans and employers.

Here are some of the act’s key provisions that could impact you.

Higher RMD age

Raised from 72 to 73 beginning 2023, then to 75 in 2033.
This extends the time frame before RMD’s are required to allow for potentially greater tax deferred growth in retirement accounts.

Reduced tax penalty for failure to take RMD’s

Effective immediately, the penalty is reduced from 50% to 25% of the amount not withdrawn with further reduction to 10% if corrected in a timely manner.

Surviving spouse can be treated as the deceased spouse

The surviving spouse can delay taking RMD’s until the decedent spouse would have reached the applicable starting age. The RMD would then be calculated using the Uniform Life Table and the decedent spouse’s life expectancy.

Eliminated RMD’s from Roth employer plan accounts

Effective 2024, individuals are no longer required to take RMD’s from designated Roth accounts (i.e., Roth 401(k)).

529 plan rollovers to Roth IRA’s

Starting 2024, beneficiaries of 529 plans with unused funds, may rollover up to $35,000 during their lifetime to a Roth IRA in their name. Rollovers are subject to annual contribution limits. The plan must have been established for at least 15 years and contributions made within the last 5 years are not eligible for rollover.

“The back-door Roth”

This financial planning strategy was not eliminated in the act. Individuals with income that exceeds the eligible limit to make a Roth IRA contribution can first contribute to a Traditional IRA on a non-deductible basis then execute a Roth conversion.

Roth-style version of SIMPLE and SEP IRA accounts

Effective 2023, the option to contribute to Roth accounts will be available within SIMPLE & SEP plans. Prior to this change, only pre-tax contributions could be made.

Roth option for employer contributions

Allows employers to make matching contributions and non-elective contributions to designated Roth accounts (i.e., 401(k) and 403(b) plans). Employees are subject to income tax on the amount in the year of the contribution.

Qualified plan Roth catch-up contributions

Beginning 2024, catch-up contributions for those with wages exceeding $145,000 in the previous year, must be made to designated Roth accounts within retirement plans. This applies to catch-up contributions for 401(k), 403(b), and 457(b) plans but not IRA’s, and excludes self-employed individuals.

Increase catch-up contributions

Individuals 50 and older can currently make catch-up contributions of $1,000 to a Traditional or Roth IRA. In 2024, the catch-up contributions will be indexed for inflation.

Effective 2025, for those age 60-63, the catch-up contribution limit will increase to the greater of $10,000 or 50% higher than the regular catch-up amount in 2024 for 401(k) and similar plans.

Enhancements to qualified charitable distributions

Individuals can continue to utilize QCD’s at age 70 ½. The annual $100,000 cap will be indexed for inflation in 2024. Additionally, effective this year, a one-time tax-free distribution of $50,000 can be made to a charitable trust or charitable gift annuity.

Penalty-free emergency access to retirement savings

Effective immediately:
Withdrawals up to $22,000 are permitted for those affected by a federally declared disaster that occurred on or after Jan. 26, 2021,

Effective 2024:
There is a new exception to the 10% early withdrawal penalty in the case of terminal illness or domestic abuse (lesser of $10,000 or 50% of the account value). Distributions up to $1,000 per year are also permitted for personal or family emergency expenses.
Additionally, employers can establish an emergency savings account in which employees can save up to $2,500 in a Roth-style account. If requirements are met, distributions are tax-free.

Treatment of student-loan repayment as an employee elective deferral

Effective 2024, employers may make matching contributions to 401(k), 403(b), and SIMPLE IRA plans for qualified student loan repayments made by employees. This allows for employees to save for retirement while also paying down student loans.

Automatic enrollment requirement

Beginning in 2025, eligible employees will be automatically enrolled in new 401(k) and 403(b) plans with a deferral rate between 3-10%, increasing annually by 1% (up to 15%) unless employees choose to opt out.

Retirement savings lost & found

The Labor Department will create a national online searchable database.

SOURCES AND ADDITIONAL RESOURCES:

Review key takeaways of the SECURE Act 2.0

How does SECURE Act 2.0 change saving for retirement?

SECURE Act 2.0: Key provisions & planning considerations (Putnam)