In the final days of 2022, President Biden signed into law a huge omnibus funding bill. The portion of the bill addressing retirement is referred to as SECURE 2.0 for short. The acronyms that were introduced in 2019 for the first iteration stand for Setting Every Community Up for Retirement Enhancement Act. As a reminder, one of the memorable changes to the 2019 ACT was an increase in the age for required minimum distributions (RMDs) from 70.5 to 72.
SECURE 2.0 expands upon the Act introduced in 2019. Many of the provisions addressed in Secure 2.0 will not go into effect in this year. In fact, some of the changes happen as late as 2033! Let’s break down the changes, year by year, starting with those items that will impact individuals in 2023.
Required Minimum Distribution Age Increased Again
RMDs: The required minimum distribution age has been increased again, this time to age 73, effective immediately. Specifically, anyone who will be 72 in 2023 or later can wait to start RMDs until next year at age 73. Those who have already begun to take RMDs must continue. Before SECURE 2.0, if you failed to take your RMD, there was an egregious 50% penalty exacted by the IRS. With SECURE 2.0, that penalty has been reduced to 25% starting immediately. This penalty can be further reduced to 10% if the error is corrected by taking the full RMD within two years of the oversight.
Expanding the Roth
Roth IRA: SECURE 2.0 allows Roth options for SEP and SIMPLE IRAs beginning immediately. It may take some time for custodians to make this possible.
Changes to Retirement Contributions
Catch-ups: The extra 401(k) and IRA contribution allowed for those over 50 years old has been increased to $7,500 for 2023, and starting in 2024, it will be increased annually based on inflation.
Employer Contributions: This provision permits employees with 401(k)s to request that the employer match be contributed on an after-tax basis to their plan’s Roth account, if available. This match would be taxable income to the employee but would then grow tax-free and be able to be withdrawn tax-exempt. For many businesses, it will take some time to develop this capability.
Additional Savings in Qualified Longevity Annuity Contracts
QLACS: A qualified longevity annuity contract is a type of annuity that begins to pay out later in life (as late as 85) without requiring RMDs to be taken. This annuity is funded with retirement assets and, as of 2023, the amount that can be purchased has increased from $100,000 to $200,000. This purchase limit will increase with inflation.
Changes for 401(k)s
Catch-up Contribution Changes for High Earners: Starting in 2024, all employees earning wages over $145,000 in the previous year will be required to fund the catch-up portion of their retirement contribution with after-tax monies directed to Roth 401(k)s.
NO more RMDs for Roth 401(k)s: Prior to SECURE 2.0, RMDs were required for Roths inside 401(k)s. This is in contrast to Roth IRAs which have no RMD requirements. Beginning in 2024, this is being changed so that RMDs are no longer required during the lifetime of the owner for either Roth IRAs or Roth 401(k)s.
Opportunities to Improve Near-term Finances AND Save for Retirement
Student Loan Employer Matching: Many employees find themselves unable to contribute to their 401(k)s because they are repaying student loan debt. Because they aren’t contributing, they lose out on saving for retirement and the benefit of the employer match. Beginning in 2024, employers will be able to make employer-matching contributions to a retirement plan that equal the employee’s student loan repayments up to the annual limit. This accommodation will help those with student debt get a start on their retirement savings. This match will be available in 401(k), 403(b)s, 457s, and SIMPLE IRAs plans.
Pension-Linked Emergency Savings Plan (ESA): This provision of SECURE 2.0 allows employers to offer tax-free ESAs linked to a Roth 401(k) for non-highly compensated employees. Employees contribute 3% of wages, with the first $2,500 in contributions going into the ESA and any additional contributions going into the Roth 401(k). An employer can also match contributions to the 401(k) up to $2,500. Lower-wage employees often hesitate to contribute to a retirement account for fear that an emergency will come up. This provision encourages them to contribute with a backstop emergency account (ESA) from which the employee can withdraw (and repay) four times over the course of the year. The hope is that this will jump-start retirement savings.
Qualified Charitable Distributions Limit Increasing
QCDs: Qualified Charitable Distributions are contributions that come directly out of an IRA to a qualified charity. These distributions count toward an individual’s annual RMD and are not taxable. In 2023, the total QCD limit is $100,000, and starting in 2024, that limit will increase based on an inflation rate. The cost-of-living adjustment is usually announced in October, so we don’t know yet how much that adjustment will be for 2024.
Some Funds Left in a 529 Plan Can Be Rolled to a Roth
529s: In 2024, SECURE 2.0 will allow the beneficiary to roll unused funds from a 529 plan into a Roth IRA. Specifics include the fact that each 529 plan must have been established at least 15 years ago. The annual amount that can be rolled is based on the Roth contribution limit, and the total that can be rolled over during the lifetime of the beneficiary is $35,000.
2025 and Beyond
2025 Increased Catch-up Limits: SECURE 2.0 raises the catch-up IRA contribution limit for individuals 60-63 years of age. This age group’s catch-up limit will be 50% more than the current year catch-up. For example, if the catch-up for 2024 is $8,000, those 60-63 can contribute $12,000.
2027 Saver’s Match: Currently, low- and moderate-income workers who contribute to IRAs or an employer plan are entitled to a non-refundable tax credit of up to $1,000. In 2027, this tax credit will be replaced by a match from the Federal Government of 50% of contributions to retirement plans up to $2,000. The match will be deposited into the retirement plan.
2032 RMD age increases again: The new age for RMDs will increase to 75, beginning with those individuals who reach age 74 after 2032.
As you can see, the provisions in SECURE 2.0 are spread across the next few years and out as far as 2033. This was a very large Act, introduced in the last days of 2022.
The intent to encourage retirement savings for workers at all income levels is a step in the right direction.
HTG Advisors is keeping abreast of all provisions as they are clarified. We will discuss the mandates and incentives of SECURE 2.0 related to small businesses in a follow-up blog.