ARTICLE
17 November 2023

SECURE Act 2.0: New Law Makes Saving For Retirement Easier

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Legislation enacted at the end of 2022 included the long-awaited SECURE 2.0 Act of 2022 (SECURE 2.0), which expands on the Setting Every Community Up for Retirement Enhancement...
United States Employment and HR

Legislation enacted at the end of 2022 included the long-awaited SECURE 2.0 Act of 2022 (SECURE 2.0), which expands on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Many of the changes made by SECURE 2.0 make it easier to save for retirement in a tax-advantaged manner. Here are some of the highlights.

TAKING RMDS

The first SECURE Act raised the age at which individuals must begin taking required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans — from 70½ years to 72 years for those who turn 70½ in 2020 or later. SECURE 2.0 increases the starting age further, to 73 beginning in 2023 and to 75 beginning in 2033. Keep in mind that if you turned 72 in 2022 or earlier, you must continue taking RMDs as scheduled. Similarly, if you turn 73 before 2033, you need to continue taking RMDs as scheduled, even after the starting age increases to 75.

Note: An apparent drafting error creates some ambiguity over whether RMDs start at age 73 or 75 for people born in 1959. Congress will likely make a technical correction to the act to clarify that the RMDs start at age 75 for people born in 1960 or later.

DELAYING DISTRIBUTIONS

If you do not need the funds for living expenses, delaying RMDs can boost your retirement savings by allowing additional years of tax-deferred growth. Delaying RMDs may also reduce income tax on distributions if you will be in a lower tax bracket when they are made. If you turn 72 in 2023, and you have already scheduled your first RMDs, consider delaying them by a year.

The penalty for failing to take an RMD on a timely basis is also changing. In the past, it could result in a tax penalty equal to 50% of the amount that was required to be withdrawn. SECURE 2.0 reduces the penalty to 25% starting in 2023. The law also provides for further reduction, to 10%, for those who correct the missed RMD in a timely fashion.

Starting in 2024, Roth accounts in employer-sponsored plans will no longer be required to make RMDs. This is the same treatment currently available to Roth IRA owners.

CATCH-UP AND MATCHING CONTRIBUTIONS

Currently, individuals aged 50 and older may make annual catch-up contributions of an additional $7,500 to 401(k) plans and similar employer-sponsored plans and an additional $1,000 to traditional or Roth IRAs. Starting in 2024, the catch-up amount for IRAs will be adjusted for inflation. And, beginning in 2025, employer plan participants ages 60 through 63 will be able to make catch-up contributions equal to the greater of $10,000 (adjusted for inflation) or 150% of the regular catch-up amount.

Starting in 2024, employer plan participants who earned more than $145,000 (adjusted for inflation) from their employer in the previous year must make any catch-up contributions to a Roth account. In other words, these highly compensated employees will no longer be able to make catch-up contributions on a pre-tax basis.

SECURE 2.0 also boosts employer-matching contributions. Beginning in 2023, employees may elect to receive matching funds as after-tax Roth contributions — provided their plan offers this option. (Employer-matching Roth contributions will be taxable to the employee when they're made.) The act also enables employer plans to treat certain student loan payments as plan contributions for matching purposes.

CATCH-UP AND MATCHING CONTRIBUTIONS

Currently, individuals aged 50 and older may make annual catch-up contributions of an additional $7,500 to 401(k) plans and similar employer-sponsored plans and an additional $1,000 to traditional or Roth IRAs. Starting in 2024, the catch-up amount for IRAs will be adjusted for inflation, even though the amount remains the same for 2024. And, beginning in 2025, employer plan participants ages 60 through 63 will be able to make catch-up contributions equal to the greater of $10,000 (adjusted for inflation) or 150% of the regular catch-up amount; limits differ for SIMPLE Plans.

SECURE 2.0 also boosts employer-matching contributions. Beginning in 2023, employees may elect to receive matching funds as after-tax Roth contributions — provided their plan offers this option. (Employer-matching Roth contributions will be taxable to the employee when they're made.) The act also enables employer plans to treat certain student loan payments as plan contributions for matching purposes.

SECTION 529 ISSUES

Section 529 plans are a great way to fund qualified educational expenses, but distributions used for other purposes are subject to tax and penalties. SECURE 2.0 provides relief for overfunded 529 plans. Starting in 2024, the law permits up to a lifetime limit of $35,000 to be rolled over into a Roth IRA (for the same beneficiary), free of tax and penalties.

To qualify for a rollover, the 529 plan must be at least 15 years old and the rolled over funds cannot include any contributions (plus earnings on those contributions) made to the plan within the preceding five-year period. Rollovers in a given year are also subject to otherwise applicable limits on Roth IRA contributions.

FOR PEOPLE YEARS AWAY FROM RETIREMENT

Automatic Enrollment and Automatic Plan Portability

The legislation requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees, starting at a contribution rate of at least 3%, starting in 2025.

Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions

Permits employers to make matching contributions to an employee's 401(k), 403(b), or SIMPLE IRA plan in an amount equivalent to the employee's qualified student loan payments.

A qualified student loan payment generally means any debt incurred by an employee to pay qualified higher education costs of the employee. Student loan-related matching contributions may be excluded for nondiscrimination testing for elective contributions.

This applies to contributions made for plan years beginning after December 31, 2023.

EMERGENCY SAVINGS

Defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first four withdrawals in a year would be tax- and penalty-free.

Related Read: SECURE 2.0 Brings Changes to Retirement Plans and Planning

REVISIT YOUR PLAN

These are just some of the many changes contained in SECURE 2.0's 300-plus pages. Significant new tax laws such as this often requires individuals to revise their plans. Contact your ORBA advisor to discuss how SECURE 2.0 affects yours.

SIDEBAR: QUALIFIED CHARITABLE DISTRIBUTIONS JUST GOT EVEN BETTER

If you are charitably inclined, you know that charitable deductions are available only if you itemize and may be limited to a certain percentage of your adjusted gross income (AGI). A qualified charitable distribution (QCD) allows people age 70½ and older to bypass these restrictions by transferring up to $100,000 tax-free from an IRA to a qualified public charity. As a bonus, this amount counts toward any RMDs for the year.

Among other changes (see main article), the SECURE 2.0 Act expands the advantages of QCDs. It does it in two ways:

  • If you are 70½ or older, you can now make a one-time QCD of up to $50,000 to a charitable gift annuity or charitable remainder trust that benefits you or your spouse. That means you enjoy the tax benefits of a QCD, while receiving a lifetime income stream; and
  • The $100,000 and $50,000 limits will be adjusted for inflation going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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