New Retirement Rules Ushered in With SECURE Act 2.0

January 09, 2023
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The “Setting Every Community Up for Retirement Enhancement Act”, commonly known as the SECURE Act, was signed into law in December 2019, and brought the biggest changes to the retirement planning landscape in decades.  Aside from those who were immediately impacted by some of the biggest changes, such as raising the age for Required Minimum Distributions (RMD) from 70 ½ to 72 and mandating quicker withdrawals for inherited retirement accounts, many of the sweeping changes we’re quickly forgotten about when our lives were upended a couple months later due to the global pandemic. 

As part of the recently passed omnibus spending bill, Congress has endeavored to further enhance the original Enhancement Act by introducing a whole host of new provisions, many designed to make it easier for more Americans to save more for retirement and thus SECURE their financial future.  While the sheer number of provisions in the so-called “SECURE Act 2.0” is too great to detail in this post, we’ve highlighted below some that we think are the most consequential for our clients:

RMD Age Increased Again

The age at which RMDs must begin is now 73, meaning those who turn age 72 in 2023 don’t need to take an RMD until 2024.  In 2033, the RMD age will increase to 75.

Those who turned age 72 in 2022 or before had an RMD requirement last year.  If you miss an RMD, the SECURE Act 2.0 provides some relief: the penalty on the amount not taken is reduced to 25% from 50%.  If the shortfall is rectified within the “Correction Window” (typically two years or less), the penalty is further reduced to only 10%.

IRA Catch-Up Contributions to be Indexed to Inflation

Since 2006, IRA owners aged 50 and over have been able to contribute an additional $1,000 to their IRAs annually (known as a “catch-up contribution”).  Since the catch-up contribution’s initial introduction in 2002, however, it has never been linked with inflation (unlike the IRA contribution itself).  Starting in 2024, however, IRA catch-up amounts will be indexed to inflation and will increase in increments of $100.

Increased 401(k) and 403(b) Catch-Up Contributions for Participants in their Early 60s

Beginning in 2025, 401(k) and 403(b) plan participants will be able to fund increased catch-up contributions (up to 150% of the regular catch-up contribution amount) in the years they reach ages 60, 61, 62, and 63.  As an example, if this provision were in place this year, a 401(k) participant in their early 60s could fund the standard contribution of $22,500, plus the regular contribution amount of $7,500, plus an additional 50% of that catch-up amount (or $3,750), for a total contribution of $33,750.

High Wage Earners Required to Use Roth Option for 401(k) and 403(b) Catch-Up Contributions

Congress giveth and Congress taketh away.  Now that we got you excited about increased catch-up contributions, SECURE Act 2.0 mandates that catch-up contributions for plan participants over age 50 must be made to the Roth option for those with wage income over $145,000 (adjusted for inflation) in the previous calendar year.  While this will expand access to tax-free assets for more retirees in the future, it will cause more income to be taxed in the meantime.  This provision is scheduled to take effect in 2024.

If an employer-sponsored retirement plan doesn’t offer a Roth option, then no one in the plan would be eligible to fund catch-up contributions.  This would restrict participants’ ability to adequately fund their retirement, essentially contradicting the spirit of the legislation, so we expect to see a lot of changes to 401(k) and 403(b) plans in the coming years.

Limited 529 to Roth IRA Transfers After 15 Years

Beginning in 2024, funds in Section 529 college savings accounts can be transferred to a Roth IRA in the beneficiary’s name.  This provision has received a lot of attention since the bill passed, but a number of conditions must be satisfied for the transfer to be valid.  For example, the 529 plan must have been maintained for 15 years or longer, and any contributions made within the last five years are not eligible for transfer to the Roth IRA.  Furthermore, the annual limit for 529-to-Roth transfers is limited to the annual IRA contribution maximum for the year ($6,500 for 2023), less any regular traditional or Roth IRA contributions made by the beneficiary.  In other words, the 529 beneficiary cannot fund their own IRA contribution and transfer funds from a 529 to a Roth up to the contribution limit in the same year.  Crucially, the beneficiary must have earned income of at least the amount of the transfer.  Finally, the maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.

More Provisions Than You Can Shake a Stick at

In all, the SECURE Act 2.0 contains almost 100 new provisions, and we don’t want this blog post to be as long as the bill itself (nearly 400 pages!).  As we’re still sorting through the details ourselves, following are a few other notables from the legislation:

  • Qualified Charitable Distributions (QCD) can still begin at age 70 ½ with the maximum annual amount (currently $100,000) indexed for inflation in the future.
  • Employers will be permitted to deposit 401(k) and 403(b) matching and nonelective contributions to employee’s Roth account. These employer contributions amounts would then be included in the employee’s income in the year of the contribution.
  • Effective in 2024, employees with an RMD requirement (age 73 or over at the time) will not be required to take an RMD from their Roth 401(k) or Roth 403(b) accounts.
  • Starting in 2024, employers will be able to match employee’s student loan payments with a contribution to their 401(k) or 403(b) account.
  • SIMPLE IRA and SEP IRA plans for small businesses can offer Roth options beginning this year. A new “Starter 401(k)” plan will also be introduced which will require auto-enrollment but no employer matching contributions.
  • Effective this year, participants in governmental 457(b) plans will be able to update their contribution percentage at any time rather than only on the first of the month.

Industry experts and analysts are still parsing through the legislative text to understand the meaning of some of the new provisions, and it’s already clear that additional clarification will be required before some new planning opportunities can be implemented.  As provisions come into effect over time, and as further clarifications are made, we can assist you with maximizing your retirement savings opportunities in the ever-changing environment ushered in with the new SECURE Act 2.0.

 

The views expressed represent an assessment at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, strategies, sectors or markets in general.  The above commentary has been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness.  Past performance is no guarantee of future results.   This is not a complete analysis of every material fact.  All expressions of opinion are subject to change without notice.

The information contained in this document does not cover all tax strategies that may apply, is not a complete guide to tax planning, and does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters.  Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.  Talk to your financial advisor before acting on information in this document.