SECURE ACT 2.0:

KEY RETIREMENT PROVISIONS

January 10, 2023

After months of deliberation, the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 has finally been signed into law as part of the year-end omnibus spending bill. The SECURE Act 2.0 builds upon the original SECURE Act, which was enacted in 2019.

The legislation includes many changes, and we’ve summarized those related to retirement.

Increasing Retirement Savings

Effective 2023

• The age at which individuals must take required minimum distributions (RMDs) from retirement accounts increases from 72 to 73 for those born 1951-1959 and to age 75 for those born 1960 or later.
• If a tax-deferred retirement account holds an annuity, current law requires that the account be bifurcated between the portion of the account holding the annuity and the rest of the account for purposes of applying the RMD rules. This treatment may result in higher minimum distributions than would have been required if the account did not hold an annuity. Section 204 permits the account owner to elect to aggregate distributions from both portions of the account for purposes of determining minimum distributions.

EFFECTIVE 2024

• IRA catch-up contributions will be indexed to inflation. Currently, the IRA catch-up contribution for those age 50+ is $1,000.
• Section 110 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.
• SIMPLE IRA/SIMPLE 401(k) contribution limits go up by 10% (including catch-up contributions). Under current law, the annual contribution limit for employee elective deferral contributions to a SIMPLE IRA plan is $15,500 (2023) and the catch-up contribution limit beginning at age 50 is $3,000.
• Some individuals will be able to move money from a 529 plan directly into a Roth IRA. Restrictions include:
  • The 529 plan must have been maintained for 15 years or longer.
  • The Roth IRA receiving funds must be in the name of the beneficiary of the 529 plan.
  • Contributions within the last 5 years (along with the associated earnings on that portion of the contributions) are ineligible to be moved to a Roth IRA.
  • The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.

EFFECTIVE 2025

• Employer retirement plan catch-up contributions for participants ages 60-63 will increase by the greater of: $10,000 (indexed for inflation) or 150% of the regular catch-up contribution amount for 2025. Savings Incentive Match Plan for Employees (SIMPLE) Plan participants who are ages 60-63 will have their catch-up limit increased by the greater of: $5,000 (indexed for inflation) or 150% of the regular catch-up contribution amount for 2025.

EFFECTIVE 2026

• Achieving a Better Life Experience (ABLE) accounts can be established for individuals who become disabled prior to age 46. ABLE accounts could only be established for individuals who became disabled prior to turning age 26 under previously established law.

Retirement Plan Rule Changes

EFFECTIVE 2023

• The penalty for missed RMDs will be decreased from 50% to 25% of the shortfall.
• Qualified Charitable Distribution annual limits (currently $100,000) are now indexed to inflation.
• Taxpayers have the ability to set up Roth versions of Simplified Employee Pension (SEP) IRA and SIMPLE IRA accounts; these accounts were previously only pre-tax.
• Another important area in the bill centers on catch-up contributions in employer plans where the employer plan may not currently offer a Roth component. If an employer's plan includes employees who are eligible to make catch-up contributions and earned over $145,000 in the previous year, but the plan did not include a Roth catch-up contribution option, then catch-up contributions would not be permitted, regardless of their previous-year wages. Effective 2023, employers are allowed to deposit matching and/or nonelective contributions in a Roth, assuming the contributions are not subject to a vesting schedule.

EFFECTIVE 2024

• RMDs will be eliminated for Roth accounts in qualified employer plans such as Roth 401(k)s.
• Individuals inheriting an IRA from their spouse will have the ability to elect to be treated as the deceased spouse for RMD purposes. This election can provide some interesting opportunities from a planning perspective; the key items related to this election are:
  • RMDs for the surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin.
  • Once the RMD age is reached, the surviving spouse will calculate RMDs using the Uniform Lifetime Table, rather than the Single Lifetime Table that typically applies to beneficiaries.
  • If the surviving spouse passes away before the RMDs begin, the surviving spouse’s beneficiaries will be treated as the original beneficiaries of the account.
• Catch-up contributions in employer-sponsored 401(k), 403(b), and governmental 457(b) plans will be treated in a Roth manner for certain high-income taxpayers. The language in this provision is important; specifically, “high-income” in this provision is defined as having wages that exceeded $145,000 for the preceding calendar year from the employer sponsoring the plan. Based on the language used, it would appear self-employed individuals would be able to continue making pre-tax catch-up contributions with no regard to the threshold.

Overall, this legislation provides new incentives for individuals to save for retirement and represents an important step in ensuring Americans have a secure financial future in their retirement years. The SECURE Act 2.0 is a significant piece of legislation, and interpretation of the granular details will take time. As the details emerge, so will new planning opportunities, and we are closely monitoring the situation to make sure we’re taking full advantage of these changes. Feel free to reach out to your advisor with any questions. Thank you for the confidence you have placed in us.

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