On December 29, 2022, SECURE Act 2.0 was signed into law. This is an expansion of the original SECURE Act (Setting Every Community Up for Retirement Enhancement Act) in 2019 and is designed to further mitigate what many retiring Americans are facing – running out of money. There are many provisions to this law, the few that are addressed below are just the ones that most commonly affect clients.
For Businesses
In an effort to increase business owners offering group plans, SECURE Act 2.0 increased current tax credits for plan costs (recordkeeping, TPA, and financial professional expenses) and created an additional tax credit that provides a partial reimbursement of actual employer contribution.
Even when offered, not all eligible employees participate in their group plan. Going forward, with a few exceptions, new group plans must include auto-enrollment with a salary deferral of at least 3%, increasing by 1% per year to a max of 10%-15%.
Employer contributions have always been given on a pre-tax basis, but employers now can give employees the option to choose them on a pre-tax or Roth basis. Additionally, Roth option is now available on SIMPLE IRAs and SEPs.
For Individuals
Changes to Required Minimum Distribution (RMD) is a big portion of this new law. RMDs are an actuarily-determined amount that account owners must withdraw from certain retirement accounts starting at a certain age. By forcing this withdraw, the IRS is able to either collect the tax on this withdraw and/or to control the amount that is inherited. SECURE 2.0 increased the age at which an account owner must start their RMD. For years, that was 70.5 years old, after 2019, it was increased to 72, and now it has increased to age 73 starting in 2023. However, if an owner has started their RMDs already, then they must continue to do so. The RMD age will increase again to age 75 in 2033.
- Example: Investors who turned 72 in 2022 or earlier did not benefit from SECURE Act 2.0 and will need to continue to follow the previous rules. They need to continue to take their RMD if they took it in 2022. If not, they have until 4/1/2023 to withdraw for 2022 plus take their 2023 distribution by 12/31/23.
RMD penalties have decreased dramatically. It used to be a harsh 50% penalty, but starting in 2023, if you miss your RMD, the penalty is only 25%. If fixed quickly, it can be further decreased to 10%.
Employer retirement accounts (i.e. 401K, defined benefit, etc.) have always been subject to RMD rules, including Roths. Starting in 2024 (not 2023), Roth employer retirement accounts will now be exempt from RMD requirements.
Inherited IRAs have had many changes in the last few years. For deaths that occurred prior to 2019, all Inherited IRAs (and Inherited Roth IRAs) were subject to RMDs starting the year after death. Since these accounts were essentially being “stretched” out over many years, they were commonly referred to as Stretch IRAs. Stretch IRAs were eliminated and replaced with the 10-year rule for deaths that occurred between 2019 and 2022 unless the beneficiary is a spouse, a minor child, one that is NOT younger than 10 years, disabled, or chronically ill. The 10-year rule basically states that the inherited account must be depleted by the end of the tenth year following the death. Starting in 2023, when and how you distribute the pre-tax assets matter, if the original owner has reached his/her RMD age prior to passing. If so, beneficiaries are now required to take a RMD in years 1 – 9 and then deplete the account by the end of the tenth year. The IRS has not issued guidance on whether the beneficiary needs to make up the distributions if the RMD was not taken in 2021 or 2022, though they will not be subject to a 50% penalty.
Catch-up provisions have changed as well. Starting in 2024, Catch-up contributions must be made into Roth accounts for those earning more than $145K (indexed to inflation). Additionally, starting in 2025, those who are age 60-63 will have a higher Catch-up limit (higher of 150% standard Catch-Up or $10K).
For those who are charitably inclined, a Qualified Charity Deduction (QCDs) is a direct transfer from an IRA to a qualifying charity. As long as a few rules are followed, QCDs can be counted towards satisfying the RMD for the year. There is an annual limit of $100K per year. Starting in 2023, a QCD may be taken to fund a Charitable Remainder UniTrust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity up to a maximum one-time amount of $50K.
Interestingly, SECURE Act 2.0 which focuses on helping Americans be retirement-ready also touches on student loans and 529s. To help young workers who may be struggling to decide between paying off student loans or saving for their retirement, starting in 2024, employers are also able to provide the option to match on an employee’s qualified student loans. As for 529s, the concern for most families is that their child may not use (or use up entirely) an account limited only to college expenses. Starting in 2024, beneficiaries have the ability to roll a lifetime limit of $35K to their Roth IRA. Annual contribution limits apply (lesser of IRS maximum or earned income), but income limits do not. The 529 must be opened for at least 15 years and contributions from the last 5 years cannot be rolled over.
These days, it seems like tax law changes happen faster than custodians and investment companies are able to update their processes and forms. In some cases, nuances have yet to be ironed out by the IRS. SECURE Act 2.0 will affect almost every American. For those who are closer to retirement, make sure you talk to your financial advisor about possible planning opportunities under the new law.