The original Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20th, 2019. This past December 29th, 2022, the SECURE Act 2.0, was enacted as part of a $1.7 trillion spending package called the Consolidated Appropriations Act of 2023. Both pieces of legislation seek to reform how Americans prepare for retirement as well as withdrawals from retirement plans.
The SECURE Act 2.0 presents both retirement planning opportunities and potential complexities. It opens up opportunities to save more and expands tax benefits of Roth IRAs and 401(k) plans. The following list of provisions is by no means extensive, as the bill itself is more than 350 pages long, but it does include the changes we feel will affect our clients most.
Note: Implementation for each SECURE 2.0 provision varies from being effective immediately, to ramping up in future years. A few even apply retroactively. Many of its newest programs won’t effectively roll out until 2024 or later, giving us time to plan. We’ve noted with each provision when it’s slated to take effect.
1. The Act Raises the Required Minimum Distribution Age, Again.
The age at which retirees must begin required minimum distributions (RMDs) from certain retirement accounts was raised to age 72 from age 70 ½ in 2019 with the original SECURE Act. Now, the SECURE Act 2.0 raises the age requirement further to age 73 beginning January 1, 2023, and further increasing to age 75 by January 1, 2033. If you turned age 72 in 2022 or earlier, you must keep taking RMD’s.
This change gives you more flexibility over when you take your taxable income in retirement. It also adds some additional years of flexibility into your retirement tax plan. It can also help you limit your exposure to Medicare’s Income Related Monthly Adjustment Amount. This change, however, does not affect any change for those who will use their accounts to live on by that time.
Impact of SECURE Act 2.0
RMD age pushed back to 73
RMD age pushed back to 75
2. No Roth RMDs in Employer Retirement Plans
Roth accounts in employer retirement plans (such as Roth 401(k) accounts) will be exempt from Required Minimum Distributions beginning in 2024. There are no changes for individual Roth IRAs. These accounts continue to have no RMD requirement.
3. Enhanced RMDs for Surviving Spouses (2024)
If you are a widow or widower inheriting your spouse’s retirement plan assets, you will be able to elect to determine your RMD date as if you were your spouse. This provision can work well if your spouse was younger than you. As described here: “RMDs for the [older] surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin.”
4. Increased Catch-Up Contributions (2025)
Starting in 2025, participants in employer provided 401(k)/403(b) retirement plans who are between the ages of 60 and 63 will be able to make annual catch-up contributions of up to $10,000 or 150% of the regular catch-up amount. This amount will be indexed to inflation.
5. IRA Catch-up Contribution Limit Indexed to Inflation (2024)
The $1,000 annual limit on IRA catch-up contributions for individuals aged 50 and older has been static since its introduction. The SECURE Act 2.0 now indexes the yearly limit to inflation starting in 2024.
6. Additional Roth Considerations
- Elimination of RMDs for employer-sponsored Roth accounts, such as Roth 401(k)s and Roth 403(b)s, to align with individual Roth practices. (effective 2024)
- Establishment of Roth versions of SEP and SIMPLE IRAs. (2023)
- Ability for employers to offer the option of receiving matching and other contributions to Roth retirement accounts. (2023). Profit sharing contributions do not qualify.
- Ability to move 529 assets into a Roth IRA. (2024) (Discussed in further detail in #7 below.)
- If wage income exceeds $145,000 (inflation adjusted) from the previous year for employees who are 50 and older, you’ll need to make catch-up contributions to a Roth account in after-tax dollars. If the employer does not have a Roth option, then the employee cannot make a catch-up contribution. (2024)
The single biggest opportunity here is the ability to build more tax efficient assets for retirement. But, the tradeoff is potentially higher taxes in the current year. High earners are still prohibited from opening a Roth account, so this change will allow for them to build tax-free assets.
7. 529 to Roth IRA Transfers
This provision is a big break for families using 529 plans to fund college expenses. Starting in 2024, 529 plan beneficiaries may roll over up to a lifetime max of $35,000 from a 529 plan to a Roth IRA. The 529 plan must have been open for at least 15 years to be eligible. Annual rollovers are subject to the annual contribution limits for Roth IRAs. The Roth IRA must be in the name of the beneficiary of the 529 plan. Prior to this provision, the distribution of funds from a 529 plan that were not needed for college expenses was taxed and penalized.
8. Changes to Qualified Charitable Distributions (QCDs)
The current $100,000 allowed to be distributed from an IRA annually to a qualified charity will be indexed for inflation. There is also the introduction of a one-time maximum $50,000 QCD to a charitable remainder trust (CRUT), charitable annuity trust (CRAT), or charitable gift annuity (CGA).
9. Provisions for Younger Savers (2024)
- Employers can add a Roth emergency savings account to employer plans to allow for non-highly compensated employees to contribute up to $2,500 annually with a number of withdrawals being tax-free and penalty-free.
- Employers can “match” student loan payments for employees by contributing the matched amount to a retirement account in the employee’s name.
- Employer 401(k) and 403(b) plans must automatically enroll eligible employees beginning in 2025. The initial automatic contribution rate will be 3% of salary.
What to Do Now
This article summarizes some of the key provisions of the Secure Act 2.0 and how they may affect your retirement savings goals. If you are a Northstar client, we will discuss these changes with you directly as they pertain to your specific situation. Since these are just a few of the many changes, it’s important you keep us informed of any changes to your financial circumstances so we can help you navigate any areas the SECURE 2.0 Act may impact. This will ensure every opportunity is maximized.