The SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 was signed into law on December 29th 2022, almost exactly 3 years after the original SECURE Act was passed. While the SECURE acronym could have used some more work (my opinion), legislators did work hard to stuff this Act with provisions that will be impactful for employer retirement savings plans – 401(k)s, 403(b)s, 457s, SEP IRAs and SIMPLE IRAs – building on the groundwork laid 3 years ago.
A total of 92 provisions made their way into the act, with the lion’s share applying solely to employer retirement plans and employees. However, there are a few items that will impact individual financial plans in the years ahead. Here’s a quick summary of the items we have on our radar:
Increase in Required Minimum Distribution (RMD) Age
The first iteration of the SECURE Act increased the RMD age from 70 ½ to 72 for individuals who had not yet started their RMD’s. SECURE 2.0 increases this by one more year from age 72 to 73. It also put into place a future increase, raising the RMD age to 75 on 1/1/2033.
A couple items to note:
Like the previous increase, this only applies to individuals who did not yet turn age 72. Anyone currently taking RMD’s or who had turned age 72 in 2022 must continue to make withdrawals as scheduled. However, this is impactful for those who haven’t yet reached RMD age and would like to delay as long as possible.
As was the case prior to SECURE 2.0, individuals have the option to take their first RMD in the year they turn RMD age or delay until April 1 of the following year. Since the new law increases the age to 73, those turning 72 in 2023 have the option to take their first RMD by the end of 2024 (the year you turn RMD age) or delay the withdrawal up until 4/1/2025. The main consideration in delaying is that a second RMD will still be required by 12/31/2025 based on the 2024 year-end account balance.
Reduced Penalty for Missed RMDs
The penalty for failing to satisfy the annual RMD requirement dropped to 25% of the missed amount, down from the current penalty of 50%. If a corrected tax return is submitted in a “timely manner”, the penalty drops further to 10% of the missed amount.
Additional Options for Qualified Charitable Distributions (QCDs)
RMD age individuals can now make a one-time gift of up to $50,000 to a Charitable Remainder Unitrust (CRUT), a Charitable Remainder Annuity Trust (CRAT), or a Charitable Gift Annuity as a qualifying QCD. The catch here is that the CRUT/CRAT must be established with this $50,000, exclusively hold QCD dollars, and can only name the IRA owner and their spouse as beneficiary. This likely won’t make sense for many individuals or charities (from an administrative perspective), leaving only the Charitable Gift Annuity option. However, this requires that payments begin within 1 year after the contribution and the payout rate must be at least 5%.
529 Plans can “rollover” to Roth IRAs
Previously, 529 plan balances that weren’t used for qualified education expenses received a 10% penalty at withdrawal. There were a few strategies around this, but a fear of “overfunding” 529 accounts was a sincere consideration for some. Congress addressed this by adding an option to rollover up to $35,000 (over a lifetime) from a 529 plan to a Roth IRA for the named beneficiary. However, this comes with multiple limitations to consider:
This is not a “rollover” in the same way that you can rollover an entire 401(k) account into your IRA. Instead, this is a different way to make Roth IRA contributions, still subject to the annual Roth IRA contribution limits ($6,500 in 2023 up from $6,000 in 2022).
If a contribution is made via rollover from a 529 plan that reaches the limit for that year, no additional contribution can be made with outside money. Income requirements also apply in the same way they would for regular contributions, so the beneficiary will need to have earned income up to the amount of the contribution.
Lastly, the 529 Plan had to have been open for at least 15 years. Contributions (and their earnings) made within the 5 years leading up to the “rollover” are not eligible, eliminating the ability to super-fund the account knowing that it likely wouldn’t be used for education.
No RMDs on Employer Plan Roth Accounts
RMDs will no longer apply to Roth accounts in employer retirement plans, even for individuals who had previously been taking them. However, those in this situation will need to take one last RMD in calendar year 2023, since the provision becomes effective 1/1/2024. This had been the last existing scenario where RMDs were required on Roth dollars.
Employer Roth Contributions
Prior to SECURE 2.0, employer contributions to a retirement plan had to be made in pre-tax dollars. This created additional planning considerations since retirees with Roth contributions were rolling over two separate “buckets” of money.
The new Act now allows employers to make matching and non-elective contributions in Roth dollars, giving employees the ability to keep their account consistent from a tax perspective. It’s important to keep in mind that employees will be responsible for paying taxes on these employer Roth contributions as they are made.
High Wage Employees Must Make Catch-Up Contributions in Roth Dollars
One piece of the legislation that restricts retirement plan options is the requirement that employees with W-2 wages of $145,000 or greater (in the prior year) make catch-up contributions in Roth dollars, requiring taxes to be paid immediately on these contributions. This likely made its way into the legislation as a means of increasing tax revenue in order to offset other “Roth-friendly” provisions. This only applies to employer plans and has no effect on individual IRA catch-up contributions.
As a reminder, catch-up contributions are additional amounts that employees aged 50 and over can save to their retirement plans in order to “catch-up” on retirement savings. For 2023, this amount is $7,500 (up from $6,500 in 2022) on top of the regular 401(k) contribution limit of $22,500 (also up $2,000 from last year) allowing up to $30,000 in total employee contributions in 2023.
Increased Catch-Up Contribution Limits for Employees Ages 60-63 (Effective 1/1/2025)
Beginning in 2025, the catch-up limit for those nearing retirement, specifically employees between the ages of 60 and 63, increases an additional 50% over the regular catch-up amount. For example, a catch-up limit of $8,000 on 1/1/25 would allow employees in that age range to make a total of $12,000 (base $8,000 + 50% additional of $4,000) in catch-up contributions on top of the regular 401(k) limit. Like the above, this provision solely applies to employer plans and does not include catch-up contributions for personal IRAs, which remained the same in 2023 at a flat $1,000 for all individuals age 50 and over. However, the base contribution limit for IRAs did increase slightly to $6,500, up from $6,000 in 2022.