On December 29, 2022, President Biden signed the $1.7 trillion, 4,000+ page 2023 omnibus bill into law, which included the 350-page retirement-focused Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0. The new SECURE 2.0 makes multiple changes to individual and employer-sponsored retirement accounts to increase savings opportunities, expand Roth accounts, broaden annuity use in retirement plans, and create administrative consistency and simplicity.  

Overall, SECURE 2.0 is good news for investors, but the downside is that the sheer volume of changes and rolling effective dates will make it challenging to stay on top of everything. To make it easier to understand the scope of the changes and which ones might apply to your situation, we organized this overview into six categories:

1. RMD Provisions
2. Roth Revisions
3. New Savings Opportunities
4. Distribution Tactics
5. Penalty Relief
6. Other retirement-related provisions

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Changes to Required Minimum Distributions in SECURE 2.0

Being forced to take required minimum distributions (RMDs) is the tax-deferred account feature that everyone loves to hate since paying taxes on the income you may not need is no fun. The below provisions provide planning opportunities to help you be as tax-efficient as possible.

RMD Age Increases

Starting in 2023, the RMD age will increase from 72 to 73. If you turned 72 in 2022, you would still be required to begin taking RMDs as scheduled. However, those who turn 72 in 2023 have another year before RMDs start. By 2033, the RMD age will rise again to 75.

Missed RMD Penalty Relief

Knowing when you must start RMDs is critical because if you miss taking an RMD, you'll face a stiff penalty! Before SECURE 2.0, the penalty was a whopping 50% of the missed RMD amount. Starting in 2023, the penalty will be reduced from 50% to 25%. You can further reduce the penalty amount to 10% if you take corrective action and submit your tax return within the specified "correction period."

RMDs Eliminated for Roth Plan Accounts

One thing that sets Roth IRAs apart from tax-deferred accounts like Traditional IRAs and 401(k)s is that they don’t have RMDs. However, Roth plans like Roth 401(k)s do have required minimum distributions. SECURE 2.0 fixes this discrepancy by eliminating RMDs from all Roth plans starting in 2024. This change provides consistency across Roth accounts and allows individuals to benefit from long-term growth.

SECURE Act 2.0 Expands Access to Roth Accounts

Roth Employer Contributions

Starting in 2023, employers will have the option to allow employees to choose how employer contributions are made, either traditional pre-tax or Roth after-tax contributions. Historically, all employer contributions were made on a pre-tax basis, so even if you were contributing to your Roth 401(k), the employer contributions we always made on a pre-tax basis. This is an excellent opportunity for people in lower income tax brackets that don't necessarily need the tax deduction and provides more flexibility and tax savings opportunities in their retirement plan.

Roth Catch-Up Contributions

Suppose you are ready to start making catch-up contributions in your employer-sponsored plan and are a high-wage earner, SECURE 2.0 limits where your catch-up contributions can go. Beginning in 2024, high-wage earners must make catch-up contributions to a Roth plan like a Roth 401(k). A high-wage earner is an individual whose wages exceed $145,000 the preceding year (indexed for inflation).

529 Plan to Roth IRA Roll-Overs

Despite the popularity of 529 college savings plans, one common complaint about them is what to do with unused 529 funds. A provision in SECURE 2.0 solves this. Starting in 2024, 529 plan funds can be rolled over to a Roth IRA in the name of the 529 plan beneficiary. The 529 account must be open for at least 15 years, and any contributions made in the five years preceding the rollover are not eligible. Rollover amounts are subject to annual Roth contribution limits and have a lifetime cap of $35,000 per beneficiary.

SECURE Act 2.0: New Savings Strategies

Catch-Up Contributions Indexed for Inflation

Beginning in the tax year 2024, the $1,000 IRA catch-up contribution limit will be indexed for inflation annually in $100 increments. This means that if you are over age 50, you can take advantage of this increase to save even more as you near retirement.

Catch-Up Contribution Limit Increased for Individuals Age 60-63

Another way SECURE 2.0 can help you save more is by allowing individuals aged 60-63 to save more. Starting in 2025, individuals aged 60-63 who are contributing to a 401(k), 403(b), or 457(b) plan will be permitted to make catch-up contributions of up to the larger of either $10,000 or 50% more than the regular catch-up amount in effect in 2024. Individuals with a SIMPLE Plan can contribute up to the larger of $5,000 or 50% more than the standard catch-up amount in effect in 2024. The catch-up contribution amounts will be indexed for inflation after 2025.

Mandatory Automatic Enrollment Provisions

The SECURE Act, passed in 2019, offered a tax credit to employers who added automatic enrollment to their 401(k) plans. SECURE Act 2.0 makes automatic enrollment in 401(k), and 403(b) plans mandatory for all new plans starting in 2025. Although, employees have the option to opt out of their employer's plan if they choose. Contributions start at a minimum of 3%, increasing gradually by 1% each year until reaching the maximum amount allowed of 10%. However, certain exemptions must be noted, such as existing 401(k) and 403(b) plans being grandfathered in and exempt from this rule, as well as any new plans from small businesses with less than ten employees, churches and governmental organizations.

Student Loan Payments Count as Elective Deferrals for Employer-Match Calculations

Anyone with significant student loan debt knows it can be hard to save for retirement when saddled with substantial student loan payments. To make matters worse, if you aren’t able to stock away for retirement, you’re leaving compensation on the table in the form of employer-match contributions. With SECURE 2.0, employers can count student loan payments as eligible contributions for matching retirement contributions starting in 2024. This change will benefit those actively repaying their student loans who want to make additional payments without sacrificing potential employer matches.

More Flexibility with Solo 401(k)s

Starting in 2023, self-employed individuals will have more flexibility to set up and put money into a Solo 401(k). An employer may establish a new 401(k) plan after the end of the taxable year but before their tax filing date and treat the plan as having been established on the last day of the taxable year. Employer contributions can fund such plans up to the employer's tax-filing date. Additionally, SECURE 2.0 allows Solo 401(k) plans to receive employee contributions up to the date of the employee’s tax return filings, excluding extension periods.

Qualified Longevity Annuity Contracts Expanded

Qualified longevity annuity contracts (QLACs) are becoming increasingly common in retirement planning and will soon become even more accessible. Effective immediately, SECURE 2.0 eliminates the 25% account balance limit and increases the maximum amount that can be used to purchase QLACs from $145,000 to $200,000. The new $200,000 limit will be indexed with inflation. These contracts will continue to be able to offer a 90-day free-look period to give retirees time to explore their options when it comes to choosing an annuity.

Expanded Income Annuity Options in Qualified Accounts

Holding income annuities in qualified plans and IRAs has been administratively challenging, thanks to several IRS regulations related to RMDs. Effective immediately, thanks to SECURE 2.0, the following benefits/features will not trigger a violation of RMD rules:

• Guaranteed annual income payment increases, not to exceed 5%
• Lump-sum payments that result in the shortening of the payment period, such as structured settlement that pays out a lump sum in lieu of future payments
• Accelerations of payments that would otherwise be payable in the next 12 months
• Dividend-like payments to annuity owners
• Offering Return-of-Premium (ROP) death benefits

Establishment Age for ABLE Accounts Extended to 46

ABLE accounts are tax-advantaged savings accounts for individuals with disabilities and their families. Under current law, ABLE accounts can be established for anyone who becomes disabled before age 26. Starting in 2026, SECURE 2.0 extends the age for establishing ABLE accounts to individuals who became disabled before age 46. With extended eligibility for individuals aged 26 or older, this is a critical opportunity for those with disabilities to better prepare for the future.

Retirement Plan-Linked Emergency Savings Accounts

SECURE 2.0 creates a new benefit designed to help individuals save for emergency expenses with “Emergency Savings Accounts” that are linked to existing employer retirement plans. This benefit is only available for non-highly compensated employees, defined as individuals who own less than 5% interest in the business and whose compensation was, at most, $135,000 the previous year (2023). This new benefit is effective immediately and allows employees to save up to $2,500 each year, with anything an employer contributes being treated as Roth contributions. Employers can set a lower maximum limit on contributions if they prefer.

New Distribution Options in SECURE 2.0

Enhanced Qualified Charitable Distributions

Qualified Charitable Distributions (QCDs) are set to undergo significant changes. In 2024, the $100,000 ordinary contribution limit will be indexed for inflation. In addition, individuals can make a one-time $50,000 distribution in cash or certain assets to one or more charitable gift annuities, charitable remainder trusts (CRUTs), or charitable remainder annuity trusts (CRATs). With this added flexibility and forward-thinking, you can maximize your tax benefits while supporting your favorite causes.

New Beneficiary Option for Surviving Spouses

From 2024 onward, the new beneficiary option for surviving spouses is significant in its ability to provide asset protection. This option enables a surviving spouse to choose to be treated as their deceased partner's qualified plan participant, meaning they are afforded all the safeguards and protective measures of ERISA. The clear benefit here is that an employer-employee relationship bolsters financial security against loss or liability. This will ensure that surviving spouses can manage their assets with peace of mind and remain protected, even when their partner passes away. This new provision promises to make a world of difference for those who take advantage of it.

Retirement Tax Relief for Disabled First Responders

Starting in 2027, disabled first responders will have the opportunity to receive a tax-free retirement pension, building off of current disability pensions. This change is expected to apply retrospectively and prospectively, with a pro-rata attribution granted for those already receiving disability pensions. With the retirement of many of these brave individuals on the horizon, they must get the support they need as they transition into this new chapter of their lives. The tax-free retirement pension will provide valuable assistance towards ensuring their livelihoods are secure, even after their service ends.

72(t) SEPP Safe Harbor

The 72(t) Substantially Equal Periodic Payments (SEPP) Safe Harbor, effective in 2023, promises to bring great new benefits to those choosing to use its annuity payment calculation method. This innovative method is aimed at providing the best possible value when it comes to calculating and preserving retirement funds. Closely observing IRS regulations, this new safe harbor is expected to make a sizable difference in protecting the financial security of those looking for assurance that their money will continually be distributed as they transition into their golden years.

72(t) SEPP Partial Rollovers Permitted

Under current law, if an individual rolls over a portion of a 72(t) SEPP account, it triggers full taxability on the entire account. Under SECURE 2.0, starting in 2024, individuals can roll over only a portion of funds from an existing SEPP plan so long as the originally determined distribution schedule continues to occur.

SECURE Act 2.0 Reins in Some Penalties

If you've ever considered withdrawing money from a qualified plan, you know that unless you meet certain exceptions, you'll be hit with a 10% penalty. Additionally, penalties related to forbidden transactions or excess contributions came with stiff penalties as well. Here’s a brief look at some of the provisions related to penalties in SECURE 2.0:

Penalty-Free Withdrawals: Significant Expansion of Available Exceptions

These exceptions are effective immediately unless otherwise indicated:

• Qualified Disaster Recovery Distributions: If an individual’s primary residence is in a federally declared disaster area, they may withdraw up to $22,000 penalty-free if done within 180 days of the disaster. This provision applies retroactively to all disasters that occurred on or after January 26, 2021.
• Emergency Withdrawal: Up to $1,000 may be accessed penalty-free for any “unforeseeable or immediate financial needs related to necessary personal or family emergency expenses.” The emergency withdrawal exception can only be used once per calendar year. Subsequent withdrawals can only be made once the previous withdrawal has been made, regular contributions offset, or three years have passed since a prior withdrawal was made. This exception takes effect in 2024.
• Terminal Illness: To qualify, an individual has to have been certified by a physician as having an illness or condition which can “reasonably be expected to result in death” in 84 months. Distributions may be repaid within three years.
• Victims of Domestic Abuse: An individual that self-certifies that they are a victim of domestic abuse may withdraw up to $10,000 or 50% of the vested balance, whichever amount is lower. This takes effect in 2024.
• Qualified Long-Term Care Distribution: Qualified retirement plans are eligible to distribute up to 10% of their balance or $2,500 (adjusted for inflation) per year to pay for premiums for certain long-term care (LTC) contracts. Distributions are taxable but exempt from the 10% early distribution penalty. This takes effect in 2026.
• Age 50 Exceptions: The Age 50 Public Safety Worker Exception has allowed an exception to the 10% early withdrawal penalty for public safety workers who separate from service in the year they turn 50 or older. Effective immediately, the Age 50 Exception will be extended to include:
  • Private-sector firefighters
  • State and local corrections officers
  • Qualifying workers with 25 or more years of service for the employer sponsoring the plan

Clarification on Prohibited Transactions: Only Involved Account Disqualified

Effective immediately, if a prohibited transaction occurs within an IRA, only the IRA engaged in a prohibited transaction is deemed disqualified; other IRAs owned by the individual are not. This is a minor change in practice but a move to better align statutory language with IRS enforcement.

Excess Contributions Statue of Limitations Reduced

A tax court decision in 2011 ruled that the statute of limitations for a missed RMD starts with filing Form 5329, the form used to report such mistakes. SECURE 2.0 makes it clear that the statute of limitations starts running with filing Form 1040 for the year the mistake was made. The statute of limitations for assessing penalties for excess contributions is still years. Still, it effectively shortens the time of enforcement, starting when the mistake was discovered to starting when the mistake was made.

Other Retirement Plan Changes in SECURE Act 2.0

There are a few more notable changes as part of SECURE 2.0 that don’t fit into the above categories, but we want to draw some brief attention to them here:

• Reduced service requirement for part-time workers to be eligible for automatic enrollment in employer plans from three years to two years. Effective in 2025.
• Family attribution rules for employer aggregation apply without regard to any community property. Effective in 2024.
• Termination distribution of employer accounts without employee consent increased from $5,000 to $7,000. Effective in 2024.
• Permit 403(b) sponsors to participate in multiple employer plan (MEP) arrangements. Effective in 2023.
• Meaningful enhancements to employee stock ownership plans (ESOPs), including expanded gain deferral provisions and ESOP eligibility rules. Effective in 2028.
• SEP eligibility for household employees. Effective in 2023.
• New rules limit "abusive" conversation easements by denying tax deductions if the amount of the conservation contribution is 2.5x the owner’s basis. Effective retroactively in 2022.

Making Sense of SECURE Act 2.0

Many new rules took effect in the SECURE Act of 2019, and SECURE Act 2.0 has even more provisions. It can be difficult to simply take inventory of these new rules, much less understand how they can affect your situation. Reach out to an advisor today to learn more about SECURE 2.0 and what this might mean for you and your retirement planning.