In December 2022, the U.S. House of Representatives passed the Consolidated Appropriations Act of 2023, otherwise known as SECURE ACT 2.0. The bill is an addition to the SECURE (Setting Every Community Up for Retirement) Act of 2019 and brings significant changes to retirement savings accounts. While dozens of revisions are described in the roughly 350 pages of legislation, we’ll share a brief overview of SECURE 2.0, highlighting some key updates and what you need to know.
Changes to Required Minimum Distributions (RMDs)
Section 107 of the SECURE Act 2.0 further extends the starting age for RMDs on qualified retirement accounts. For the next 10 years, RMDs would begin at age 73. After January 31st, 2033, the RMD age will be 75. This particular change sets up what seems like a significant inequity between those turning 73 before and after that date and we wouldn’t be surprised if it is revised again at some point before 2033.
Here’s another way of understanding the new timeline for RMDs:
- Individuals born in 1950 or earlier should have started RMDs either at age 70½ or 72.
- Individuals born between 1951 – 1959 begin taking RMDs at age 73.
- Individuals born in 1960 or later will take RMDs beginning at age 75.
Reduction in penalties for missing RMDs
Another notable change with SECURE Act 2.0 is the reduced penalty for failing to take RMDs (or for distributions that fall short of the RMD amount). Prior to SECURE 2.0, the penalty was 50% of the required amount. Now, the penalty has been cut in half to 25%, and, if remedied in a timely manner, individuals can request the penalty be lowered to just 10%.
Elimination of RMDs on designated Roth accounts
Beginning in 2023, RMDs on designated employer Roth accounts – such as 401(k) plans – are no longer required. Before SECURE 2.0, this exemption only applied to Roth IRAs.
Addition of SIMPLE and SEP Roth IRAs
Previously, accountholders could only make pre-tax contributions to SIMPLE and SEP plans. Section 601 of the SECURE Act 2.0 cleared the way for individuals to make Roth contributions to their Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Accounts (IRAs), and Simplified Employee Pension (SEP) plans. These changes are effective as of the 2023 tax year.
Addition of Emergency Savings Linked to Retirement Accounts
Instead of tapping into their retirement monies (often paying a 10% penalty for early withdrawals), individuals can now utilize emergency savings accounts as an add-on to existing employer-sponsored retirement plans. However, these emergency savings accounts are only available for “non-highly compensated employees” (not in the top 20% of compensation within the company, an ownership interest of no more than 5%, and, for 2023, annual compensation that does not exceed $135,000). Contributions are made on a Roth basis, considered elective deferrals, and are limited to $2,500 (or the employer’s lower limit, if applicable). Each year, individuals can also make at least four withdrawals without having to pay a penalty or fee for the distribution.
Changes to Employer Matching and Nonelective Contributions
Participants in defined contribution plans – such as 401(k) and 403(b) plans – can choose to treat employer matching and nonelective contributions as pre-tax or Roth. To help participants save for retirement, Section 110 of SECURE 2.0 allows employers to use qualified student loan payments as elective deferrals for matching purposes.
Changes to IRA Catch-Up Contributions
SECURE 2.0 includes several changes to IRA catch-up contributions, including:
- Adding an inflation adjustment to catch-up contributions will increase the limit in $100 increments as costs of living rise (starting in 2024).
- Requiring higher-income individuals (those earning more than $145,000, adjusted for inflation) to make catch-up contributions on qualified retirement plans such as 401(k) and 403(b) on a Roth basis. Individuals who earn less than $145,000 (also adjusted for cost of living) can choose between pre-tax or Roth treatment for their catch-up contributions.
- Increasing catch-up contribution limits to $10,000 or 50% more than the standard catch-up contribution for individuals aged 60, 61, 62, and 63. These increased limits take effect in the 2025 tax year and will adjust for inflation after 2025.
Addition of 529-to-Roth Rollovers
Section 126 of SECURE 2.0 allows beneficiaries of 529 plans to roll funds from their college savings plan into a Roth IRA tax-free and penalty-free. 529-to-Roth rollovers are limited to accounts that have been open for at least 15 years, and these rollovers are subject to annual Roth IRA contribution limits and a lifetime maximum of $35,000.
Updates to Insurance Products
SECURE 2.0 also included updates to certain insurance products like annuities. Previously, individuals could only contribute up to 25% of their account balance to a Qualifying Longevity Annuity Contract (QLAC). SECURE 2.0 did away with the 25% limit, allowing contributions of up to $200,000 (indexed for inflation) from a traditional IRA, 403(b), or 457(b) plan. Another important change related to annuities covers the purchase of exchange-traded funds (ETFs) within certain insurance products. The result of this new legislation is that variable annuities and variable universal life (VUL) policies can now include ETFs that are, as Section 203 of the bill states, “insurance-dedicated.”
New Exceptions to 10% Withdrawal Penalty on Retirement Accounts
Ordinarily, withdrawals taken from retirement savings plans are subject to a 10% penalty if the account owner has not yet reached age 59½. SECURE 2.0 provides exceptions to this penalty for:
- Private-sector firefighters who are at least 50 years old.
- Public safety officers who are at least 50 years old.
- State and local government corrections employees who are at least 50 years old.
- Public safety officers who have been employed with the plan sponsor for at least 25 years.
- Individuals who have a terminal illness.
- Survivors of domestic abuse (up to $10,000 [indexed for inflation] or 50% of the account balance, whichever is less).
- Withdrawals for emergency expenses (limited to one withdrawal per year and subject to a $1,000 maximum).
While the changes we discussed above are significant they’re a few among many new changes brought about by the passage of the SECURE Act 2.0. These new laws make it easier for individuals to prepare for retirement. With the help of your financial advisor, you can take advantage of some of these provisions, changes, updates, and expansions. We will continue to send more updates via email. If you have not done so already, please contact our office to update your