Secure Act 2.0 – What’s In It For Me?

Included was a long-awaited update to retirement savings incentives known as the SECURE Act 2.0, a follow-up to the original Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

SECURE Act 2.0 provides many provisions intended to help investors save more for retirement. Many of the new provisions are not effective until 2024 or later; however, some are effective immediately in 2023. While some details need to be further clarified by the IRS, we wanted to summarize for our clients the key provisions we think are most likely to have some impact on your financial situation this year and beyond. We hope our summary gives you a sense of the scope of these changes and when they become effective.

Initial required minimum distribution (RMD) age increases from 72 to 73 in 2023

• The age at which participants must begin taking distributions from their traditional IRAs and other qualified retirement plans such as 401(k), 403(b), and 457(b) jumps from 72 to 73 beginning January 1, 2023, and again to 75 in 2033. For our clients who turn 72 in 2023, your RMDs are pushed back by 1 year compared to the current (SECURE 2019) rules and will begin at age 73 (2024). Age 73 will continue to be the age at which RMDs must begin through 2032. Then, beginning in 2033, the RMD age will be pushed back further to age 75 (note: individuals who turned 72 in 2022 were not affected by this new rule).
• Delaying the age for beginning RMDs is likely to be a “neutral-to-positive” change for most. Those who already need to take distributions to support living expenses will view the change as largely irrelevant. For others, however, this may allow you to delay income for a few more years to prevent the higher Medicare Part B/D premiums and to have a few more years to do tax-efficient Roth conversions.
• Beginning in 2024, RMDs for qualified employer Roth accounts (e.g., Roth 401k, Roth 403b) are eliminated. Previously, qualified Roth account holders were subject to RMDs, unlike holders of Roth IRAs. Now both types of Roth account are harmonized, at least as far as RMDs go.
• The penalty for failing to take an RMD is lowered from 50% to 25% of the amount that should have been taken. The penalty reduces even further (to 10%) if the RMD failure is corrected “in a timely manner.”

Higher catch-up contributions and greater use of Roth accounts

• Employers will be permitted by SECURE Act 2.0 to deposit matching and/or nonelective contributions to employees’ Roth accounts (e.g., Roth accounts in 401(k) and 403(b) plans). These contributions will be included in the employee’s income in the year of contribution.
• Beginning in 2024, those 50 and older AND earning more than $145k in wages for the preceding calendar year from the employer sponsoring the plan must make their catch-up contributions to employer plans (does not apply to catch-ups for IRAs) to a Roth account (i.e. after-tax contributions) within the employer plan.
  • Note, the language appears to focus on wages in excess of $145k, therefore those who are self-employed may still be able to continue making pre-tax catch-up contributions.
  • Also note, switching employers during a year appears to reset the “$145k” clock, since the $145k cap is based on wages earned the preceding year from the employer/sponsor.
• Beginning in 2025, those aged 60-63 will have their qualified employer plan catch-up contribution limits increased to the greater of $10,000 or 50% more than the regular catch-up (indexed for inflation) for the year.
• $1,000 catch-up contributions to IRAs for those 50 and older will be annually indexed for inflation beginning in 2024.

Post-death beneficiary withdrawal options for surviving spouses of retirement account owners permits the surviving spouse to elect to be treated as if they were the deceased spouse

• Currently (under SECURE 2019), when a surviving spouse inherits a retirement account from a deceased spouse, s/he has a variety of options at their disposal that are not available to any other beneficiary (i.e., rolling the decedent’s IRA into their own, electing to treat the decedent’s IRA as their own, and remaining a beneficiary of the decedent’s IRA). Beginning in 2024, SECURE Act 2.0 will extend the list of spouse beneficiary options further by introducing the ability to elect to be treated as the deceased spouse.
• Making such an election would provide the following benefits to the surviving spouse:
  • RMDs for the surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin.
  • Once RMDs are necessary (the year the decedent would have reached RMD age, had they lived), the surviving spouse will calculate RMDs using the Uniform Lifetime Table that is used by account owners, rather than the Single Lifetime Table that applies to beneficiaries; and
  • If the surviving spouse dies before RMDs begin, the surviving spouse’s beneficiaries will be treated as though they were the original beneficiaries of the account (which would allow any Eligible Designated Beneficiaries to stretch distributions over their life expectancy instead of the 10-Year Rule that would otherwise apply).
• The targeted “use-case” of electing this new option appears to be for a surviving spouse who inherits retirement accounts from a younger spouse, who therefore would be able to delay RMDs longer and have smaller RMDs than otherwise would be the case.

529-to-Roth IRA rollovers allowed after 15 years

• Beginning in 2024, unused funds within 529 college savings accounts can be rolled over to a Roth IRA tax-free. The 529 must have been opened for at least 15 years and any contributions to the 529 within the last 5 years (and the earnings on those contributions) are ineligible to be moved to a Roth.
• The Roth IRA receiving the rollover funds must be in the name of the beneficiary of the 529, not the Owner (though it’s not yet clear in the current version of the text if the owner of the 529 changes the beneficiary (to him/herself maybe?) would it reset the 15-year clock. Stay tuned!)
• Rollover amounts cannot exceed the annual maximum limits for Roth IRAs ($6,500 currently; $7,500 for those 50 and older), less any other contributions made to a traditional IRA or Roth IRA for the same year (i.e., no doubling up on contributions).
• The account owner of the Roth IRA must have earned income in the year of the rollover to be eligible to do the rollover contribution, as with regular Roth IRA contributions. If earned income is less than $6,500 (2024), then that is the max rollover contribution allowed for that year.
• There is a $35,000 lifetime cap on these 529-to-Roth IRA rollovers during an individual’s lifetime.
• Transfers of funds from 529s to Roth IRAs will not be subject to the same income limitations as for ordinary contributions to Roth IRAs. Anybody who has a 529 can fund a Roth IRA with the rollover (subject to the limitations noted above).

Qualified charitable distributions (QCDs)

• Beginning in 2023, people 70.5 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 (CRUT), a charitable remainder annuity trust (CRAT), or a charitable gift annuity. This is an expansion of the type of charity, or charities, that can receive a QCD. Amounts contributed count toward RMDs, if applicable. For gifts to count, they must come directly from the IRA by the end of the calendar year. Unfortunately, it appears that the new rules do not apply to Donor Advised Funds (DAF).
• QCDs (currently limited to $100,000 per individual per year) will be indexed for inflation beginning in 2024.

Creation of SIMPLE Roth IRAs and SEP Roth IRAs. Beginning in 2023 taxpayers will have two new opportunities for Roth (after-tax) contributions to their retirement savings accounts. SECURE Act 2.0 authorizes the creation of both SIMPLE Roth IRAs and SEP Roth IRAs. Previously, SIMPLE IRAs and SEP IRAs only allowed pre-tax contributions.

Access to savings for emergencies

• Beginning in 2024, investors will be allowed to take an early “emergency” distribution from their retirement accounts to cover unforeseeable financial needs of up to $1,000. This emergency distribution could only be taken once per year and won’t be subject to the usual 10 percent penalty that applies to early distributions (in addition to the income tax owed).
• Additionally, plan sponsors could set up emergency savings accounts within the plan and allow participants to contribute (after-tax) up to a maximum $2,500 account balance. Amounts in this account can be withdrawn as-needed once per month.
• Victims of federally declared disasters (after January 21, 2021) can make penalty-free withdrawals from an IRA or qualified employer plan if under the age of 59.5. Typically, withdrawals taken from an IRA or qualified plan before age 59.5 incur a 10% penalty (some exceptions apply) in addition to the tax on the amount. Additionally, the tax owed on the $22,000 maximum withdrawal can be made over 3 years, beginning in the year of the payout. Similarly, people with terminal illnesses can take pre-age-59.5 withdrawals without incurring the 10% penalty.

Employers can offer student loan debt relief by making matching contributions to a qualified plan that are tied to the participants’ loan repayments.

And starting in 2026…

• 529 ABLE accounts become accessible to more blind and disabled individuals by raising the age from which disability must be present from 26 years old to 46 years old.
• Up to $2,500 from qualified plans can be used penalty-free to pay long-term care premiums.

Since each of your individual financial situations is unique, we encourage you to reach out to us for a deeper discussion of how SECURE Act 2.0 may impact you.