In the last few days of 2022, the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was passed by Congress and signed by President Biden as part of the omnibus spending bill. It provides additional benefits and incentives to people saving for retirement.
The original SECURE Act was passed in 2019. Most notably it (1) eliminated the so-called Stretch IRA, which had allowed non-spouse beneficiaries to spread withdrawals over their life expectancy, but now are required to deplete the account within 10 years, and (2) postponed required minimum distributions (RMDs) from IRAs and other retirement plans from age 70½ to age 72. There were several provisions designed to increase retirement plan participation, but SECURE Act 2.0 goes further.
Changes to RMD Rules
SECURE 2.0 further raises the age at which RMDs must begin from 72 to 73, starting immediately in 2023. Retirement account owners born in 1951 can now wait until 2024, or, if they wish, further delay their first distribution until April 1, 2025. (Note that if they wait until April 1, 2025, they will have two taxable distributions in 2025, because the deadline for subsequent distributions is December 31.) The age will increase again to 75 in 2033.
Although many retirement account owners may need to withdraw from their accounts to pay for their retirement, those with substantial income and assets can enjoy a longer period of tax-deferred growth and postpone taxation, which may be optimal. But delaying distributions may not be the best course of action, because it will result in higher distributions in future years. That could have negative tax consequences, including moving into a higher tax bracket, triggering higher Medicare premiums or Social Security taxation, or possibly resulting in being subject to the tax on net investment income. An excellent strategy for addressing these possibilities is to use the postponement to make Roth conversions from Traditional IRA accounts. This has an added benefit for heirs of a retirement account, who will now inherit a tax-free account instead of a tax deferred account on which taxes will be due when funds are withdrawn.
SECURE 2.0 reduces the penalty for failing to take the required minimum distribution from 50% to 25%, and to 10% if corrected quickly.
The new rules allow a surviving spouse to delay RMDs until the year that the deceased spouse, if younger, would have reached the RMD age. This change takes effect in 2024.
Starting in 2024, RMDs for Roth 401(k)s will no longer be required, bringing them into line with Roth IRAs, which have never had RMDs.
Changes to Qualified Charitable Distributions
Although the age for RMDs has been increased, the age at which an IRA owner can make a Qualified Charitable Distribution (QCD) remains at 70½. The maximum amount for making QCDs is still $100,000 per year but starting in 2024 will be indexed to inflation. Also, a one-time distribution of $50,000 is allowed for Charitable Gift Annuities, Charitable Remainder Unitrusts, and Charitable Remainder Annuity Trusts. (Because of the requirement that the QCD funds must be the only funds in the trust, it may not be worth the expense and effort to set up one of the remainder trusts, leaving the Charitable Gift Annuity as the best option of the three.)
Retirement Plan Contributions
Starting in 2024, SECURE 2.0 allows for an employee’s college loan payment to substitute for a retirement plan contribution and thus qualify for the employer’s match, if it is available.
Starting in 2025, newly-established employer plans (but not existing plans) will be required to “auto enroll” employees at a 3% rate, rising gradually to 10%. The employee would have to opt out if they do not wish to participate.
Starting in 2024, participants in employer-sponsored qualified plans who turn age 60, 61, 62, or 63 during the year of the contribution will be able to make higher catch-up contributions in addition to their maximum regular contribution ($22,500 in 2023), up to the greater of $10,000 (to be indexed) or 150% over the regular catch-up limit, which is now $7,500. However, starting in 2024 all catch-up contributions to employer-sponsored plans, which are available to participants aged 50 and above, would have to be Roth contributions if the participant’s wages in the prior year exceeded $145,000 (to be indexed to inflation). Roth contributions offer no tax deduction but withdrawals are tax-free. (Catch-up contributions to Traditional IRAs will still be allowed; the amount, currently $1,000, will be indexed to inflation starting in 2024.)
To make more workers eligible for employer-sponsored retirement plans, SECURE 2.0 further loosens the criteria for part-time workers to require 500 hours in each of two consecutive years rather than 500 hours each year for three consecutive years, as specified in the original Act. Employer plans can be more liberal but cannot be more restrictive. This change will take effect in 2025.
Employers can now offer Roth accounts in SIMPLE IRA and SEP IRA plans as soon as 2023. Also, SEP IRAs can be offered to domestic employees. In SIMPLE 401(k) plans, catch-up contributions for participants turning age 60, 61, 62, or 63 during the year are increased to the greater of $5,000 or 150% of the regular catch-up amount.
Starting in 2023, the retirement plan start-up credit for employers with 50 employees or fewer is increased from 50% to 100% of the start-up costs, subject to some limitations. An additional credit is available for employer contributions in the first four years.
The Saver’s Credit for people with low-to-moderate incomes has been changed to a Saver’s Match of 50% on the first $2,000 in retirement savings, starting in 2027. To be eligible, one must be at least 18 years of age, not be a student or dependent, and have income under certain levels.
Changes to Withdrawal Rules
Under SECURE 2.0, retirement plan participants will be allowed to self-certify their need for hardship withdrawals from the plan, unless the employer has knowledge otherwise. Also, the penalty on early withdrawals, up to $1,000 per year, will be waived, although if not repaid, the participant must wait three years to be eligible for another $1,000 withdrawal. In addition, employers could add an “emergency savings account” to their retirement plan that would allow a non-highly-compensated employee to contribute after-tax money up to $2,500, with the excess flowing into the qualified plan, effective 2024.
The 10% early withdrawal penalty will be waived on withdrawals up to $22,000 if the account owner lives in an area covered by a federally-declared qualified disaster. The money must be repaid or declared as income over a three-year period. The penalty will also be waived if a doctor certifies that the participant has a terminal illness.
The legislation contains many other changes, most of which individually may not affect many people, but may do so in the aggregate. Among them…
- Starting in 2024, beneficiaries of 529 plans will be allowed to gradually transfer up to $35,000 from their 529 plan to a Roth IRA, subject to the annual maximum amount for an IRA contribution. The 529 plan must have been maintained for at least 15 years and the transferred funds can’t include money contributed in the past five years plus earnings.
- Starting in 2023, up to $200,000 from retirement assets can be used to purchase a Qualified Longevity Annuity Contract. The previous limit was 25% up to $145,000.
- Starting in 2026, retirement account owners under age 59½ can take penalty-free distributions of up to the lesser of 10% of their retirement balance or $2,500 to pay premiums for certain long term care insurance contracts.
It is worth noting that SECURE 2.0 did not eliminate the so-called “Backdoor IRA”, which allows taxpayers whose income is too high to qualify for a Roth IRA contribution to instead contribute to a non-deductible Traditional IRA then immediately convert the account to a Roth IRA.
As always, contact us anytime with your SECURE Act 2.0 or other questions by email or by calling (833) 888-0534 x2.
The views and information contained in this article and on this website are those of West Branch Capital LLC and are provided for general information. The information herein should not serve as the sole determining factor for making legal, tax, or investment decisions. All information is obtained from sources believed to be reliable, but West Branch Capital LLC does not guarantee its reliability. West Branch Capital LLC is not an attorney, accountant or actuary and does not provide legal, tax, accounting or actuarial advice.