President Biden recently signed into law the latest incarnation of the SECURE Act as part of an omnibus spending bill. The original SECURE Act made some significant changes, including pushing back the age for required minimum distributions (RMDs) to begin. But with 90 provisions affecting retirement, SECURE Act 2.0 arguably goes further in helping more Americans prepare for retirement.
This article highlights nine of the most significant changes. Keep in mind that the legislation’s details are being parsed out, and the rules could change. Consider talking with a financial advisor before you change your retirement plan.
Increased Catch-up Contributions
If you’re age 50-plus, you may already take advantage of catch-up contributions for your 401(k) or another workplace retirement plan. For example, the general contribution limit is $22,500 in 2023. But retirement savers 50 and older can contribute an additional $7,500, for a total of $30,000
Starting on January 1, 2025, you can contribute an extra $10,000 per year (instead of the $7500 limit) to your employer plan (indexed to inflation) if you are 60 to 63.
However, effective in 2024, high-wage earners may need to place their contributions into a Roth account. As this Fidelity article notes, if you earn more than $145,000 in the prior calendar year, your catch-up contributions for age 50 or older will need to be made using after-tax dollars into a Roth plan.
IRAs will also see increasing catch-up contributions. Currently, you can make a $1,000 catch-up contribution if you’re 50 or older. Starting in 2024, that amount will be indexed to inflation, which means it can increase from year to year.
Roth Account Matching
Previously, your employer could not make matching contributions to Roth accounts, only to your pre-tax plan, like a regular 401(k). Under SECURE Act 2.0, you can opt for matching contributions into a Roth plan.
Roth RMDs
You may know that Roth IRAs don’t require minimum distributions. However, employer-sponsored Roth accounts do. This changes in 2024, when Roth 401(k)s, 403(b)s, and 457(b)s will not be subject to RMDs any longer.
Speaking of RMDs …
RMD Age Pushed Back
The age that RMDs begin is increasing. Currently, RMDs must start at age 72. Beginning this year, the age moves to 73. It increases again in 2033 to 75. The new rules affect:
Most 401(k) and 403(b) plans
Traditional IRAs
SEP and SIMPLE IRAs
Rollover IRAs
Most small business accounts
Less Painful RMD Penalty
If you fail to take an RMD, you are penalized, and SECURE 2.0 doesn’t change that. But it does reduce the “ouch” part of the penalty.
Under the old rule, you would have to pay a penalty of 50% of the RMD amount you didn’t take. In 2023, that penalty drops to 25% of the amount not taken. And it will drop even further—to 10%—if corrected in a timely manner.
Automatic Enrollment
Right now, when you take a new job, you opt in to your company’s 401(k) or 403(b) plan. To boost participation rates, the SECURE Act 2.0 requires new plans launched after December 29, 2022, to automatically enroll eligible employees. That means you’ll need to opt out rather than opt in.
Starting in 2025, the plans will enroll new employees at a minimum contribution rate of 3%, which you can adjust up or down as needed.
Part-Time Employees
Part-time workers (defined as 500 hours/year) have not been able to participate in their company’s 401(k) plan until after three years of service. With SECURE 2.0, that number is reduced to two years.
Qualified Charitable Distributions
Qualified charitable distributions (QCDs) allow people age 70.5 to direct their RMD to charity. Up until now, the limit was $100,000 per year. Beginning in 2023, this limit will be indexed to inflation. Also starting in 2023, QCDs can be used to fund a one-time gift to a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity—an expansion on the types of charities that can receive your QCD. Note that QCDs to donor-advised funds are still not allowed.
529 Plans
Owners of 529 plans have struggled over what to do with the account balance after they’ve helped their beneficiaries with education expenses. Making withdrawals that weren’t education related has meant a 10% penalty and taxes.
SECURE 2.0 allows you to roll over the 529 plan assets, tax- and penalty-free, into a Roth IRA for the beneficiary. However, you must meet the following conditions:
The 529 plan account must be at least 15 years old before rolling it over.
You cannot make a rollover that exceeds the Roth IRA’s annual contribution limit.
The lifetime rollover limit is $35,000.
Final Thoughts
The notes above are just a high-level summary of some of the more relevant changes for our clients that are embodied in the SECURE Act 2.0. It’s important to look at the details when applying these changes to your circumstances. In addition, the act includes a number of other provisions not touched on here.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.