What you need to know about the SECURE Act 2.0

The SECURE 2.0 Act of 2022 was signed into law on December 29, 2022, by President Biden. It was part of a larger $1.7 trillion federal omnibus spending package providing over 90 new retirement plan provisions. Summarized are some of the most important aspects of this new legislation set to reshape how Americans plan for retirement.

Required Minimum Distributions

The original SECURE Act moved the age for beginning required distributions to age 72. Now the SECURE 2.0 Act of 2022 will gradually increase that over 10 years starting at age 73 in 2023 and then again moving up to age 75 in 2033. In addition, the excise tax for those who fail to make required distributions will be lowered from 50% to 25% beginning this year. If corrected in a timely manner, it would be reduced further to 10%.

• Changes to the age when an individual must begin required minimum distributions (“RMD”) from qualified retirement accounts
  • For those born 1950 or earlier, RMDs begin at age 72 (no change)
  • Born 1951-1959, RMDs begin at age 73
  • Born 1960 or later, RMDs begin at age 75

Qualified charitable distributions (QCDs) count towards this distribution requirement but are limited to $100,000 per taxpayer. Those will now be indexed for inflation after 2023.

Employer Plan Withdrawals

This Act eases the ability of taxpayers to make withdrawals from their retirement plan in more circumstances without being hit with the 10% penalty. Federally declared disaster areas will now allow for a 180-day window for withdrawals when the taxpayer’s principal home is located within that area. After 2023, victims of domestic abuse will be exempted from penalties on withdrawals the lesser of $10,000 or 50 percent of the account value. Those with terminal illness can make exempt withdrawals and those with a deemed personal financial emergency can take a modest withdrawal of $1,000.

Automatic Enrollment

SECURE 2.0 looks to stimulate employer plan participation through several measures beginning this year. Employees will be automatically enrolled in the plan at a rate of 3%. That rate will be automatically increased one percent each subsequent year up to a maximum of 10%. Employees may opt out of automatic enrollment and there are exceptions for businesses in existence less than three years, ten or fewer employees, church plans, and government plans.

Catch-Up Contributions

Currently, there are additional contributions allowed (“catch-up contributions”) for participants upon reaching age 50. Those were previously fixed for IRAs but will now be indexed for inflation after 2023. The $6,500 catch-up allowed to participants in 401(k), 403(b), and most 457 plans will jump to $7,500 beginning this year.

• Increased Retirement Plan Catch-up Contributions for Working Individuals in their early 60s (effective 2025)
  • 401(k) and 403(b) plan participants that are ages 60, 61, 62, and 63 will be able to increase their catch-up contribution to the greater of $10,000 or 150% of the regular catch-up contribution in 2025.
  • This is meaningful news for those working into their 60s as these individuals will be able to defer more income and boost their retirement balances. 

Beginning in 2024, all catch-up contributions are required to be contributed to an after-tax account (Roth) for anyone earning more than $145,000.

Student Loan Debt

Beginning in 2024, employers will be allowed to make matching contributions in conjunction with participant student loan payments.

Roth Expansions

Starting this year, employees may elect to have their employer matching contribution go to their Roth account instead of a pretax account in an employer sponsored retirement account. The employee will pay tax on those contributions when making this election. The Roth feature (after tax) will now be allowed for SIMPLE and SEP retirement plans, which previously only provided for pre-tax contributions.

Beginning next year, Roth 401(k) plans will no longer be subject to required distributions (RMDs).

Greater options for surviving spouses inheriting qualified retirement accounts

• Currently, a surviving spouse inheriting a deceased spouse’s qualified retirement account has the option to roll the account into their own IRA or to treat the decedent’s IRA as their own, among other choices. SECURE Act 2.0 allows for more options
• Now, RMDs for surviving spouses can be:
  • Delayed until the deceased spouse would have reached his or her own RMD beginning age and 
  • Taken based on the deceased spouse’s lifetime table
• This means smaller RMDs for the surviving spouse, less taxable income leading to a potentially lower tax bill

529 Plan Rollovers

Beyond the SECURE 2.0 Act of 2022, Section 126 of the larger spending bill amends the Internal Revenue Code to provide a new opportunity for beneficiaries of 529 plans as of 2024.

• Individuals can now transfer funds from 529 plans to Roth IRAs (effective 2024)
  • The following conditions must be met to utilize the strategy:
    • The Roth IRA must be in the same name as the beneficiary of the 529 plan
    • The 529 plan must have been maintained for 15 years or longer
    • Any contributions to the 529 plan, and earnings attributed to those contributions, within the last 5 years cannot be transferred to the Roth IRA
  • The transfer amount is constrained to the IRA contribution limit for that year and counts toward the IRA contribution limit (no double dipping)
  • The maximum amount that can be moved from a 529 to a Roth IRA during the individual’s lifetime is $35,000
  • Changing the 529 plan beneficiary resets the 15 year clock

More

• Employers may offer small incentives aimed at encouraging employee participation.
• The Department of Labor will create a searchable database to assist people in finding lost benefits.
• The service time requirements for part-time participants is reduced from 3 years to 2 years.
• Public safety officers may take early distributions exempted from penalties when reaching age 50 or 25 years of service.  This includes private sector firefighters and some correction officers.
• The nonrefundable Saver’s Credit is replaced in 2027 with a federal matching contribution deposited to your IRA or retirement plan.

We have included the most impactful provisions here but there are additional aspects that may be of interest or applicable to your personal situation. In addition to our team of advisors, the RMB Retirement Plan Solutions (RPS) team is here to help individuals and institutions navigate the complexities of retirement planning. If you have any questions about how this affects you or your retirement plans, please contact your RMB advisor or our Retirement Plan Solutions team to find out more.