On December 29, 2022, President Biden signed into law a $1.7 trillion spending package. The package includes the SECURE 2.0 Act, a series of provisions that will affect the way many Americans plan and save for retirement.
SECURE 2.0 builds on the SECURE Act of 2019, which, among other measures, increased the age at which retirees must take required minimum withdrawals (RMDs) from 70½ to 72. Key provisions in the new package include additional increases to the RMD age, as well as less severe penalties for failing to take an RMD. In addition, savers over the age of 50 will be able to make larger catch-up contributions beginning in 2025.
Many of the SECURE 2.0 Act’s provisions take effect January 1, 2023. Still, others may take years to implement. Here’s what you need to know about SECURE 2.0 and how it may affect your retirement plan.
#1: CHANGES TO REQUIRED MINIMUM DISTRIBUTIONS (RMDS)
To keep people from using retirement accounts to avoid paying taxes, the IRS requires individuals to begin taking minimum distributions from certain qualified accounts once they reach a certain age.
The SECURE Act of 2019 increased the age at which individuals must begin taking required minimum distributions (RMDs) from 70½ to 72. SECURE 2.0 raises the RMD age to 73 beginning January 1, 2023. In 2033, the RMD age will increase to 75.
Keep in mind if you turned 72 in 2022 or earlier, you’ll need to continue taking your annual RMDs. If you turn 72 in 2023 and have already scheduled your RMDs this year, you may want to consider delaying withdrawals until they become mandatory.
Moreover, the IRS previously imposed a penalty of up to 50% for failing to satisfy your RMD before the deadline. SECURE 2.0 reduces the penalty to 25% of the RMD amount and 10% if an individual corrects the discrepancy in a timely manner.
In addition, Roth accounts in employer retirement plans will be exempt from RMDs beginning in 2024.
#2: INCREASES TO CATCH-UP CONTRIBUTIONS PER THE SECURE 2.0 ACT
The IRS allows those aged 50 or above to make catch-up contributions to qualified retirement plans.
In 2023, individuals over the age of 50 can contribute an additional $1,000 to an individual retirement account (IRA). Currently, this amount isn’t indexed to inflation. However, that will change beginning in 2024.
Meanwhile, those 50 years old and above can contribute an additional $7,500 to an employer-sponsored retirement plan in 2023. Beginning in 2025, individuals between the ages of 60 and 63 can make annual catch-up contributions up to $10,000 to a workplace plan. This amount will continue to be indexed to inflation.
It’s important to note that if your income exceeds $145,000 in the previous calendar year, you’ll need to make your catch-up contributions to a Roth account in after-tax dollars. Those earning less than $145,000 are exempt from this requirement.
#3: EMPLOYER MATCHING FOR ROTH RETIREMENT ACCOUNTS
Prior to SECURE 2.0, matching in employer-sponsored retirement plans was on a pre-tax basis only. According to the new law, employers will be able to offer employees the option of receiving matching contributions to their Roth retirement accounts.
Since Roth contributions are made after taxes, earnings within the account and future withdrawals are tax-free in most cases, making this a potentially meaningful change for some retirement savers. However, it may take time for employers to make this option available due to administrative hurdles.
#4: CHANGES TO QUALIFIED CHARITABLE DISTRIBUTIONS (QCDS)
If you don’t need your RMD, the IRS allows you to donate it to charity through what’s called a qualified charitable distribution (QCD).
A QCD allows IRA owners to transfer up to $100,000 directly to charity each year before the RMD deadline. However, not all charities are eligible to receive QCDs.
SECURE 2.0 expands which types of charities can take QCDs. Beginning in 2023, individuals above age 70 ½ can make a one-time gift up to $50,000 to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity as part of their QCD limit.
#5: PROVISIONS FOR YOUNGER RETIREMENT SAVERS
The SECURE 2.0 Act also includes provisions to help younger workers save for retirement. For example:
- Automatic enrollment and automatic plan portability. Beginning in 2025, the new law requires employers offering new 401(k) and 403(b) plans to automatically enroll eligible employees at an initial contribution rate of 3%. It will also provide the option for employees with low-balance retirement accounts to automatically transfer their balance to a new plan when they change jobs.
- Emergency savings within defined contribution plans. Starting in 2024, employers can add a Roth emergency savings account option to defined contribution retirement plans. Non-highly compensated employees can contribute up to $2,500 annually, which may be eligible for an employer match depending on the plan’s rules. In addition, their first four withdrawals per calendar year will be tax-free and penalty-free.
- Student loan debt. Beginning in 2024, employers can “match” an employee’s student loan payments by contributing an equal amount to a retirement account on their behalf.
- 529 Plans. SECURE 2.0 allows 529 plan assets to be rolled over to a Roth IRA—subject to annual Roth contribution limits and a lifetime limit of $35,000—after 15 years. The Roth IRA must be for the 529 plan beneficiary.
AN EXPERIENCED FINANCIAL ADVISOR CAN HELP YOU NAVIGATE THE SECURE 2.0 ACT
Indeed, these are just a few of the SECURE 2.0 Act’s key provisions that may affect retirees and retirement savers. Ideally, this summary can help you better understand the changes coming, so you can plan accordingly.
However, it’s also important to note that this is complex legislation with many rules and caveats. You may want to consider working with a financial professional who can help you develop a long-term retirement plan that considers your financial needs and goals alongside these changes.
We’re here to help. If you’d like to speak with an experienced financial advisor about developing a plan for your retirement, please contact us. We look forward to hearing from you.