For more than a year, the Senate and the House of Representatives discussed issues that needed to be addressed as a follow-up to the SECURE Act of 2019 – including many small fixes to make retirement saving easier.
Despite having bipartisan agreement, the bill languished until December 23, 2022, when it was folded into the 4,000-page, $1.7 trillion 2023 Consolidated Appropriations Act and passed.
Many of the changes affect employer-based plans by raising the limits of catch-up contributions, helping employees build emergency funds and pay off student loans, and promoting retirement savings by allowing auto-enrollment of employees in 401(k)s.
However, not all changes offer immediate relief: some take effect in 2023, but for one, you will have to wait until 2033.
Here are some of the more essential features of SECURE 2.0.
RMD age increases
Individuals are expected to spend their retirement savings during their lifetime and not use retirement plans to transfer wealth to beneficiaries. The federal government also wants access to the tax revenues tied up in tax-advantaged accounts. Thus, the IRS requires that savers start withdrawing money from their retirement plans at a certain age as Required Minimum Distributions (RMDs).
The SECURE Act of 2019 raised that age from 70½ to 72. Now, SECURE 2.0 raises the age on January 1, 2023, to 73 for those who reach age 72 after 2022. The next increase will be to age 75, but only on January 1, 2033.
Changes to RMD-related penalties
The penalty for not taking the total RMD amount by its deadline is reduced in 2023 from 50% to 25% of the missed withdrawal amount. If the shortfall is corrected promptly, the penalty can be further reduced to 10%.
10% early-withdrawal penalty exceptions
A 10% penalty is added to the taxes due if you withdraw funds from a tax-advantaged retirement account before age 59½. Now, SECURE 2.0 has added several new exceptions, such as:
- Terminal illness (effective immediately)
- Federally declared natural disasters, $22,000 limit (retroactive to 1/26/21)
- Domestic abuse, $10,000 limit (2024)
- Financial emergencies, $1,000 limit (2024)
- Long-term care, $2,500 limit (effective three years from SECURE 2.0 signing)
To help workers who are behind in their retirement savings, the IRS allows those approaching retirement age to set aside more money as “catch-up” contributions in IRAs, 401(k)s and other retirement accounts in addition to regular contributions.
If you have a 401(k), 403(b), 457(b) or federal government Thrift Savings plan and are over 50, your catch-up limit is $7,500 in 2023. Starting in 2025, if you’re 60 to 63, you can “supersize” your catch-up contribution to the greater of $10,000 or 150% of the standard 2024 catch-up amount. (For example, an $8,000 limit would become $12,000.) And the $10,000 figure will be adjusted for inflation yearly as of 2026.
With traditional and Roth IRAs, in 2023, the maximum contribution is $6,500, with a $1,000 catch-up contribution if you’re over 50. While the $1,000 catch-up amount has not increased with time, thanks to SECURE 2.0, the amount will be indexed for inflation starting in 2024.
Roth versions of instruments provide certain benefits, but a prompt tax advantage is not one since contributions are made with after-tax funds. In its pursuit of immediate tax revenues, the federal government is introducing Roth versions to different elements with the SECURE 2.0 Act.
For example, starting in 2023, Roth contributions are being added to SEP and SIMPLE plans, and in 2024 all over-50 catch-up contributions for higher-income savers must be made with after-tax funds as a Roth.
On the other hand, in 2024, Roth employer-based plans – which until now have been subject to RMDs during the saver’s lifetime, will become exempt from lifetime RMDs (as they are for Roth IRA holders today).
529 plan rollovers
A 529 plan is a tax-advantaged savings plan used to pay for qualified education expenses for K-12, college and apprenticeships. Starting in 2024, SECURE 2.0 will permit tax- and penalty-free rollovers from 529 savings accounts to Roth IRAs for 529 beneficiaries, thus freeing funds that would otherwise be stuck if you found other ways to pay for education.
Three conditions exist: the account has to be open for 15 years or more, and the amount you can roll over in any year must abide by Roth IRA annual contribution limits that year. Lastly, the maximum amount rolled over is $35,000 during the beneficiary’s lifetime.
People with no emergency savings will likely tap into their retirement accounts to cover their needs. To help improve the lack of emergency savings, starting in 2024, SECURE 2.0 is creating pension-linked Emergency Savings Accounts that employers can offer employees. Employers may choose to auto-enroll lower-compensated employees at up to 3% of pay – until an employee reaches the maximum contribution set anywhere up to $2,500. After that, any additional contribution would go into the employee’s after-tax Roth retirement account.
Student debt makes it difficult for workers to contribute to employer-based retirement plans. To reverse that, starting in 2024, SECURE 2.0 lets employers offer a new matching contribution program. The employer contributes to the employee’s retirement plan a percentage of what the worker spends to repay student loans. The program allows the employee to pay off student debt while benefiting from an employer’s matching contributions. Applicable plans include 401(k), 403(b), 457(b) and SIMPLE IRA plans.
Qualified Charitable Distributions (QCDs) are tax-free donations made directly to a charity from an IRA – but not from a 401(k). The benefit is that the distribution is not included in your taxable income and may count toward your RMD. Starting in 2023, savers can make a one-time QCD of $50,000 to a charitable remainder unitrust, charitable gift annuity, or charity remainder annuity trust. Also, beginning in 2024, the annual QCD cap of $100,000 will be indexed to inflation.
Qualified Longevity Annuity Contracts (QLACs) are generally deferred annuity contracts you buy with funds from an IRA or employer-based defined contribution plan. Payments can start as late as age 85, but QLACs are usually exempt from RMD rules before payments start. Before SECURE 2.0, you were limited to the lesser of 25% of your account balance or $145,000. Starting on December 29, 2022, the 25% limit is repealed, and up to $200,000 can be used to buy a QLAC.
Introducing Saver’s Match
Saver’s Credit is an underutilized nonrefundable tax credit worth up to $1,000 yearly. It is available to low- and moderate-income workers who contribute to employer retirement plans or IRAs. In 2027, under SECURE 2.0, Saver’s Credit will be replaced by Saver’s Match, where the federal government matches 50% of a saver’s contributions, up to $2,000, and deposits it in the taxpayer’s IRA or plan account. The Treasury Department will promote the program.
Auto-enrollment in employer-sponsored programs
Most U.S. employers offer 401(k)-type plans, but not enough employees participate. To correct that, SECURE 2.0 will make enrollment automatic, except for specific exemptions. Employees participate by default unless they opt-out.
Beginning in 2025, employers providing newly created 401(k) and 403(b) plans will have to auto-enroll employees. Initial contribution rates will be between 3% and 10%, increasing by 1% annually up to at least 10% but not more than 15%. Plans that existed when SECURE 2.0 was enacted are grandfathered.
Some miscellaneous benefits
Countless other benefits and responsibilities can be found among the 359 pages of the SECURE 2.0 Act. For example, the Department of Labor has two years to develop an online platform that lets individuals search for lost retirement accounts. Higher SIMPLE IRA contributions will be allowed starting in 2024. The Employee Plans Compliance Resolution System (EPCRS) – the IRS’s self-correction program – will be expanded to include unintentional IRA errors. And the penalty-free distributions from retirement accounts allowed under the SECURE Act of 2019 for births and adoptions finally have a time limit on repaying the distributions: three years.
This is a lot to digest. It will take a few years for everything to fall into place so you may want to keep this article handy for a while.
Bill Harris is a Retirement Management Advisor® (RMA®), a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®), a Master Elite Ed Slott Advisor, and author of ‘Inheriting Your Spouse’s IRA’. He is President of WH Cornerstone Investments, a financial advisory firm located in Kingston, MA. Learn more at whcornerstone.com/.