Just over 3 years after the original SECURE Act was passed in December 2019, a new bill was passed on December 23, 2022, which is being called the SECURE Act 2.0. It makes a number of changes to retirement-related programs that will affect almost every American. Here are the major new provisions of this legislation that we think might be most impactful to you.
Required Minimum Distributions
There comes a time when people who have saved into tax-advantaged retirement accounts are required to start making withdrawals, and those are called required minimum distributions (RMDs). Prior to this legislation, RMDs started at a person’s age 72. Now, this has been pushed back to age 73, starting in January 2023. In 2033, the RMD age will again increase, to 75. That means that if you aren’t subject to RMDs yet and you were born in or before 1959, then you will be required to start taking them at age 73. If you are born in 1960 or later, you will not have to take them until you are 75.
This change does not impact the age at which you can start taking qualified charitable distributions (QCDs), which is a way to send money directly from a traditional IRA to a charity tax-free. The age when you can start making QCDs is still 70 ½.
Up until now, the penalty for failing to take an RMD has been 50% of the amount that was supposed to be taken but wasn’t. The penalty has now been reduced to 25% of the amount that was not taken. This can even be reduced to 10% in some cases if fixed during what the IRS calls the “correction window.”
All tax-advantaged retirement accounts (e.g. traditional IRAs, 401(k)s) have been subject to RMDs except for Roth IRAs. Starting in 2024, there will no longer be RMDs for Roth accounts in plans such as 401(k)s and 403(b)s.
Starting this year, SIMPLE and SEP IRA accounts can now offer Roth options as well. These types of plans are designed for self-employed people and owners of small businesses. Roth options allow them to contribute after-tax money and let it grow tax-free.
Another new feature related to Roth accounts is that employers can now make Roth contributions to their employees’ accounts (whether matching or other types of contributions). These employer Roth contributions would be included in the employee’s gross income for the year, but not subject to payroll taxes (Social Security and Medicare). Employers can make Roth contributions only if the employee would be fully vested in those Roth contributions.
Tax-advantaged retirement accounts have contribution limits, but they usually allow for extra contributions, called “catch-up contributions” for people who are over age 50. Starting in 2024, if your prior-year wages are over $145k for a specific employer, any catch-up contributions made to an employer plan must be made into a Roth account rather than a traditional pre-tax account. This does not apply to IRAs, only employer-provided retirement plans.
For IRAs, the current catch-up contribution amount is $1,000. It will begin to be increased for inflation starting in 2024. Then, starting in 2025, people ages 60-63 will be able to contribute 150% of the regular catch-up contribution amount from the prior year. The 150% catch-up contribution only applies to employer-sponsored retirement plans, including SIMPLE IRAs.
A 529 account is a college savings account that is commonly opened and funded by parents for their minor children. Under current law, 529 account funds must be used for qualified educational expenses or be subject to penalty. Starting in 2024, there will be a penalty-free way to transfer money from a 529 plan to a Roth IRA. This could be an attractive opportunity, however there are significant restrictions and limitations placed on this. Here are the primary conditions that must be met in order to transfer money from a 529 plan to a Roth IRA:
- The 529 plan must have been maintained for 15 years or longer.
- Any contributions made to the 529 plan in the last five years, as well as any earnings resulting from those contributions, are ineligible to be transferred.
- The transfer must go into a Roth IRA owned by the beneficiary.
- The beneficiary of the 529 (the receiving Roth IRA account owner) must have earned income.
- Transfers from 529 accounts are considered regular contributions and are therefore counted along with other contributions and subject to the normal limits ($6,500 for 2023).
- This type of transfer can be done multiple times over several years, however, the maximum amount that can be transferred over the beneficiary’s lifetime is $35,000.
Variations on Employer Matching Contributions
Traditionally, many employers make contributions to their employees’ retirement accounts based on the contributions that the employee makes from their own pay to that same retirement account. Under the new law, an employer’s matching contribution can be based on other things as well.
Emergency Savings Accounts
The SECURE Act 2.0 creates a new type of account, called an “emergency savings account,” or ESA. The idea behind this type of account is to allow people to save up for emergencies while also being eligible for their employer matching contributions into their workplace retirement plan. ESAs must be attached to an employer-sponsored retirement plan account. Money contributed to this type of account can be eligible for 401(k) matching contributions from an employer. Unlike regular employee 401(k) contributions, this money must be held in a conservative interest-bearing investment. Employees can save up to $2,500 into an ESA in total and the first four withdrawals each year are not subject to taxes, penalties, or fees.
Student Loan Payments
Starting in 2024, employers will have the option of making matching contributions to an employee’s retirement plan based on the student loan payments made by that employee. That way, an employee can still receive their employer’s match even though they are paying down student loans instead of saving for retirement.
There are numerous other changes made in the SECURE Act 2.0, such as more options with solo 401(k)s for self-employed individuals and increases in limits for qualified charitable distributions, but we feel that the changes outlined above are the most likely to have an impact on your financial situation.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.