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SECURE Act 2.0 – Retirement Planning Revisited Thumbnail

SECURE Act 2.0 – Retirement Planning Revisited

The SECURE Act 2.0, tucked into the more than 4,000 pages of the $1.7 billion Consolidated Appropriations Act of 2023, was signed into law on December 29, 2022.  Once again, retirement planning will never be the same for Americans. 

One of the major headline changes from the three-year old original SECURE Act was raising the age for RMDs from 70 ½ to 72.  SECURE Act 2.0 pushes this out further to age 73 for individuals born between 1951 and 1959, and to age 75 for those born in 1960 or later. 

Here are 9 other highlights:

1.  More changes to RMDs

  • Starting in 2023, the hefty penalty for failing to take an RMD will decrease from 50% to 25% of the RMD  amount not taken. The penalty will be reduced to 10% if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
  • Additionally, Roth employer retirement plans will be exempt from the RMD requirements starting in 2024. Currently, Roth IRAs are not subject to RMDs during the owner’s lifetime, while employer Roth 401(k) accounts are (even though the distributions are tax-free).

2. Higher catch-up contributions for older workers 

The legislation increases the annual catch-up amount for participants ages 60 through 63, from $7,500 to the greater of (1) $10,000 or (2) 150% of the regular catch-up (which would be $11,250 in 2023).  This higher limit would be indexed for inflation, effective for January 1, 2025 and later contributions.

Note: If you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars.  Individuals earning $145,000 or less, adjusted for inflation, will be exempt from the Roth requirement.

IRAs currently have a $1,000 catch-up contribution limit for people age 50 and over. Starting in 2024, that limit will be indexed to inflation, based on federally determined cost-of-living increases.

3. Matching for Roth accounts

Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts.  Previously, matching in employer-sponsored plans were made on a pre-tax basis.  

4. Expansion of Qualified Charitable Distributions (QCDs)

Beginning in 2023, people who are age 70½ and older may elect as part of their QCD limit a one-time gift of up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity.  This is an expansion of the type of charities that can receive a QCD. 

Note: QCDs will be indexed to inflation starting in 2024. The current limit is $100,000 per year.

5. Automatic enrollment and automatic plan portability

The legislation requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees, starting at a contribution rate of at least 3%, beginning in 2025.  Retirement plan service providers are permitted to offer plan sponsors automatic portability services, transferring an employee's low balance retirement accounts to a new plan when they change jobs.  Portability could be especially useful for lower-balance savers who typically cash out their retirement plans when they leave jobs, rather than continue saving in another eligible retirement plan.

Note: This provision would not apply for small businesses with 10 or fewer employees, those in business for less than three years, church plans, and governmental plans. 

6. New exceptions to the 10% early distribution penalty

 While retirement accounts are supposed to be for retirement, the pandemic reminded Congress that the unexpected can happen, and funds may need to be tapped early. SECURE Act 2.0 creates some new exceptions to the 10% early distribution penalty.  Among these are disaster relief, domestic abuse, terminal illness, and emergency need.  Some of these are effective right away, while others extend to later years.

7. Student loan debt

Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.

8. 529 Plans

In response to concerns that unused funds could be trapped in a 529 plan, Congress is allowing 529 plan funds to be rolled over to Roth IRAs. The limit is $35,000 and the 529 plan must be open for more than 15 years. This becomes effective in 2024.

9. Roth options for SIMPLE and SEPs

The trend toward expanded use of Roth accounts continues as Congress seeks immediate tax revenue.  SEP and SIMPLE plans can allow Roth contributions beginning in 2023. 

If you would like to learn more about how the Secure Act 2.0 impacts you, please contact us today.

Disclosure: This material is presented solely for information purposes and has been gathered from sources believed to be reliable, however, Pacific Asset Management cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. The preceding information is not intended to be tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Advisory services are only offered to clients or prospective clients where Pacific Asset Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Pacific Asset Management unless a client service agreement is in place.
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