In late-December 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 was signed into law. The SECURE Act made many noteworthy changes to retirement planning legislation, one of which was changing the Required Minimum Distribution age from 70 ½ to 72.
Many provisions of SECURE 2.0 have been kicked around amongst legislatures in various forms for the last few years but had not materialized until December 29th when the act was signed into law.
The purpose of SECURE 2.0 is to expand on what the first SECURE Act started a few years ago. The goal is to try to improve the nation’s collective retirement security. Both of the acts made changes that should help improve people’s retirement readiness.
This is not a comprehensive list of all of the new provisions contained in SECURE 2.0, here are some of the key points that are most likely to impact those of you reading this.
For people in or near retirement
- Changes to Required Minimum Distributions
- The age at which owners of qualified retirement accounts must start taking RMDs will increase to age 73, starting January 1, 2023. The previous age to begin taking RMDs was 72, so individuals will have an additional year to delay taking mandatory withdrawals. If you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. If you are turning 72 in 2023 then you may wait until next year when you turn 73. SECURE 2.0 also pushes the age at which RMDs must start to 75 in 2033.
- Also beginning this year, 2023, the penalty for failing to take an RMD will decrease from the current 50% penalty to 25%. The penalty will be reduced to 10% for IRA owners if the account owner withdraws the amount not taken and submits a corrected tax return in a timely manner.
- Roth accounts in employer retirement plans will be exempt from the RMD requirement starting in 2024.
- In-plan annuity payments that exceed the participant’s RMD amount, the excess annuity payments can be applied to the following year’s RMD.
- Higher catch-up contributions. Starting on January 1, 2025 individuals ages 60 to 63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. The one exception to this rule is 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.
The total contribution allowed for people age 50 and older in 2023 is $7,500. The catch-up contribution limit is $1,000 and beginning in 2024 the limit will be indexed to inflation meaning it could increase every based on the federally determined cost-of-living.
- Matching for Roth accounts. Employers will be able to provide employees with the option of receiving vested matching contributions to Roth accounts. In the past, matching in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax allowing earnings to grow tax-free.
- Qualified charitable distributions (QCDs). Beginning in 2023, people who are age 70 ½ and older may elect as part of their QCD limit a one-time gift 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 charity, or charities, that can receive a QCD. This amount counts toward the annual RMD if applicable. In order for gifts to count they must come directly from your IRA by the end of the calendar year.
For people years away from retirement
- Automatic enrollment and automatic plan portability. The SECURE 2.0 requires businesses adopting new 401(k) and 403(b) plan to automatically enroll eligible employees starting at a contribution rate of at least 3% beginning in 2025. The act also permits retirement plan service providers to offer plan sponsors automatic portability services. This change could be especially useful for lower balance savers who typically cash out their retirement plans when they change jobs.
- Emergency savings. Defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually and the first four withdrawals in a year would be tax and penalty free. Contributions may be eligible for an employer match depending on plan rules. This could encourage plan participants to save for short-term and unexpected expenses.
- Student loan debt. Starting in 2024 employers will be able to “match” employee student loan payments with matching payments to a retirement account. This gives workers an extra incentive to save while paying off educational loans.
- 529 plans. After 15 years 529 plan assets can be rolled over to a Roth IRA for the beneficiary subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit.
SECURE 2.0 provides increased opportunities for everyone to save for retirement, however everyone’s financial situation is different. Always consult your financial advisor or tax professional to understand how these changes apply to you.