The SECURE Act 2.0, signed into law in December 2022, is a major piece of legislation that makes several changes to retirement savings laws designed to improve Americans’ retirement savings ability and outcomes. Why did Congress move to make these changes? Well, put bluntly, America has a retirement crisis. Surveys by the Federal Reserve found that 28% of non-retirees have no retirement savings at all, and only 31% feel that their retirement savings are on track for where they need to be.

Some of the key provisions of the SECURE Act 2.0 include:

Required Minimum Distributions

• Increased age for required minimum distributions (RMDs) - Under previous law, individuals had to begin taking RMDs from their eligible retirement accounts at age 72. The SECURE Act 2.0 increases the age for RMDs to 73 in 2023 and to 75 starting in 2033.
• Elimination of RMDs for Roth 401(k)s - The SECURE Act 2.0 eliminates RMDs for Roth 401(k)s held in employer plans starting in 2024.
• Decrease in penalties – Failing to take your RMDs at the appropriate time used to carry a 50% penalty; this penalty has been decreased to 25% of the RMD amount not taken and 10% for IRA owners if the RMD amount is withdrawn and a corrected tax return submitted in a timely manner.

Catch-Up Contributions

• Increased catch-up contributions for older workers - Under the previous law, individuals who were age 50 or older could make catch-up contributions of up to $7,500 to their retirement accounts. The SECURE Act 2.0 increases the annual catch-up contribution limit for workers ages 60 through 63 to $10,000, beginning in 2025. If you earn more than $145,000, all catch-up contributions must be made into a Roth account; those earning $145,000 or less are exempt from this.
• Catch-up contributions will be indexed to inflation, meaning that the limit could increase every year.

Additional Changes

• Allowance of Roth contributions to SIMPLE and SEP plans. Under current law, only 401(k) plans allow participants to make Roth contributions. The SECURE Act 2.0 allows employers to offer Roth contributions to SIMPLE and SEP plans as well.
• Matching for employer-sponsored Roth accounts – Employers can now make after-tax contributions into employees’ Roth 401(k) accounts, which allows earnings to grow tax-free. Previously, matching in employer-sponsored plans was only allowed on pre-tax 401(k) accounts.
• Automatic enrollment in 401(k) and 403(b) plans and better portability options – New plans will have to automatically enroll participants in a 401(k) or 403(b) with a starting minimum contribution limit of 3% and increase the contribution annually by 1% until employees’ contribution reaches 10%. Employees must actively choose to opt out. The SECURE Act 2.0 also allows retirement plan service providers to offer plan sponsors better automatic portability services to roll over retirement accounts with a balance of less than $5,000. Previously, it could be more difficult to transfer low-balance retirement accounts to a new plan with a job change; employees often had to cash out low-balance retirement plans up to a certain amount when they left a job rather than transfer the funds to their new retirement plan.
• Easing of restrictions on qualified longevity annuity contracts (QLACs) – QLACs are deferred income annuities purchased with funds held in an IRA or 401(k); payments must begin on or before age 85. The limitation for premiums increased to $200,000 and eliminates a prior requirement that limited premiums to 25% of the retirement account balance.
• Expansion of types of charities allowed to receive qualified charitable contributions (QCDs) – People who are aged 70½ or older may elect to make a one-time gift of up to $50,000 (adjusted for inflation) as part of their QCD limit to a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust. It’s important to note that not all charities can receive QCDs. This amount counts toward an annual RMD as well. QCDs must come directly from your IRA by calendar year-end.
• Student loan debt payment matching – Starting in 2024, employers can “match” their employees’ student loan payments by making matching contributions to their retirement accounts to further incentivize saving while still paying off student loan debt.
• 401(k) emergency funds and distributions – Withdrawing money from a 401(k) or other pre-tax retirement account typically incurs a 10% penalty (note: we’re discussing withdrawing, not taking a loan on the account). The SECURE Act 2.0 now allows for up to a $1,000 withdrawal for an emergency without penalty if the distribution is repaid in full within three years. You cannot take additional distributions until that money is repaid.There is also an option that allows employers to set up and automatically enroll employees in an emergency savings account linked to their retirement accounts. However, the total balance is limited to $2,500. The first four annual withdrawals do not have fees or additional charges, and when employees leave, they can choose to cash their emergency savings out or roll it over into a retirement account.
• 529 to Roth IRA conversions – 529 plans can be a helpful, albeit underused, option for saving for your child or grandchild’s college education. The funds grow tax free, but not all states allow for income tax deductions for eligible contributions. Plus, there’s a bit of uncertainty that can hold some people back from opening one: What if your child doesn’t go to college or gets a scholarship? What happens to the funds if there’s more than they need? The SECURE Act 2.0 now allows you to convert up to $35,000 in a 529 plan open for 15 years or more to a Roth IRA for the 529 plan beneficiary with no penalties. Keep in mind that the conversion is still subject to Roth contribution limits, which means you’ll have to spread the conversion out over several years.

Tax Implications to Keep in Mind About the SECURE Act 2.0:

• The law creates a new tax credit for retirement savings. The credit is available for low- and middle-income workers who contribute to a retirement plan. Read more about the Saver’s Credit on the IRS’s website here. It also improves accessibility to 401(k) plans for part-time workers employed for one year or longer with their current company.
• The law makes it easier for small businesses to offer retirement plans. The law provides tax credits and other incentives to small businesses that offer retirement plans to their employees.

These are some of the key provisions of the SECURE Act 2.0. The law is a significant step forward for retirement savings, and it is likely to have a positive impact on the retirement security of millions of Americans. If you are saving for retirement, it is important to be aware of the changes that the SECURE Act 2.0 makes. These changes could affect your retirement savings strategy, so it is important to talk to a financial professional to see how they may impact you, ensure you’re taking full advantage of the new provisions, and avoid unnecessary penalties and fees.

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References

Federal Reserve Board. (May 2023.) Economic Well-Being of U.S. Households in 2022. https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf

Fidelity Viewpoints. (April 2023). SECURE 2.0: Rethinking Retirement Savings. Fidelity. https://www.fidelity.com/learning-center/personal-finance/secure-act-2

Hartley Beck, Rae. (March 13, 2023). How Secure Act 2.0 Changes Retirement. Forbes. https://www.forbes.com/advisor/retirement/secure-act-2/

Human Interest Team. (December 29, 2022). SECURE Act 2.0: Changes to retirement planning (2023). Human Interest. https://humaninterest.com/learn/articles/secure-act-2-understanding-proposed-legislation-securing-a-strong-retirement-act/

Internal Revenue Service. (May 3, 2023) Retirement Savings Contributions Credit (Saver’s Credit). https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit

Internal Revenue Service. (n.d.) Simplified Employee Pension Plan (SEP). https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep

Internal Revenue Service. (n.d.) SIMPLE IRA Plan. https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan

Mayo, Kelsey. (February 9, 2023). Where Credit Is ‘Due’: Tax Credits for Small Employer Plans Under SECURE 2.0. American Society of Pension Professionals & Actuaries. https://www.asppa.org/news/where-credit-due-tax-credits-small-employer-plans-under-secure-20