SECURE 2.0 ACT

The SECURE 2.0 ACT (Setting Every Community Up for Retirement Enhancement) was signed into law on December 29, 2022.  The Act is designed to help American bolster their retirement savings and strengthen their long-term financial security.  The Act includes a number of provisions related to retirement plans that: (1) expand participant coverage; (2) help participants preserve income; and (3) simplify plan rules and provide administrative procedures.  SECURE 2.0 builds on the Secure Act of 2019 and includes dozens of provisions – some effective immediately and others over the coming years.  The following is a brief summary of some of the most notable initiatives. 

What Does the SECURE 2.0 ACT Do?

Increase Required Minimum Distributions (RMD) Age.

Increase the beginning date for RMDs from age 72 to 73 starting in 2023 and age 75 in 2033.

Increase Catch-Up Contributions Under a Retirement Plan or IRA

In 2023, the retirement plan catch-up contribution limit for those over 50 is $7,500.  Starting in 2025, catch-up contributions for those ages 60 to 63 will be increased to the greater of $10,000 or 50% more than the regular catch-up contribution amount in 2024.  Catch-up contributions will be indexed for inflation starting after 2025.  IRA catch-up contribution for an individual who attains age 50 will be indexed for inflation starting in 2024.

Expand Roth Contributions

Roth contributions are now allowed for SIMPLE and SEP IRAs.  Employer contributions and employee elective deferrals (if permitted) can be designated as Roth.

Roth Catch-Up Contributions

For those with incomes exceeding $145,000, catch-up contributions will be designated as Roth contributions.

Eliminate RMDs for Roth 401(k) Accounts

Starting in 2024, required distributions will no longer need to be taken from Roth 401(k) accounts.

529 Plan Rollovers to Roth IRAs

Starting in 2024, beneficiaries of 529 plans may roll over up to $35,000 during their lifetime to a Roth IRA.  The rollovers will be subject to annual contribution limits and the 529 plan must have been open for more than 15 years.

Expand 401(k) Automatic Enrollment

Starting in 2025, 401(k) and 403(b) plan participants are automatically enrolled in the plan once they are eligible to participate. Some details are:

1. Initial contribution of at least 3% of their salary.
2. Each year contributions would increase by 1% until a goal of 10% is reached, but not more than 15%.

Emergency Savings Account

Beginning in 2024, employers can establish an emergency savings account where employees can save up to $2,500 in a Roth-style account.  Distributions will be treated like a qualified distribution from a Roth account (tax-free if requirements are met).

Exemption from 10% Early Distribution Penalty for Withdrawals for Certain Emergency Expenses

In case of financial hardship, up to $1,000 may be withdrawn per year, penalty free, from a 401(k) or IRA. The employee has the option to repay the distribution within 3 years.  No further distributions will be permitted during the repayment period unless the distribution is paid in full.

Modify the Saver’s Credit

To encourage those with low and moderate incomes, an eligible individual who makes a qualified retirement savings contribution shall be allowed a matching contribution.  Starting in 2027, the government will provide 50% credit on savings up to $2,000 ($1,000 maximum credit).  Credit is available regardless of whether the taxpayer has an income tax liability.

Student-Loan Matching Program

Student loan payments will be treated as Employee Elective Deferral for purposes of matching contributions.

Increase Qualified Longevity Annuity Contract (QLAC) Contributions

Up to $200,000 can be contributed into a qualified longevity annuity contract. The prior 25% of income limit is eliminated.

Reduce RMD Excise Tax

Reduced excise tax for failure to take required distributions from 50% to 25%.

Expand Qualified Charitable Distributions (QCD)

The QCD rules are expanded to allow for a one-time $50,000 distribution to a charity through a split-interest entity, including charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Beginning in 2024, the $100,000.00 annual limit on QCDs will be indexed for inflation.

Annuities in 401(k) Plans

Removal of barriers to the use of annuities in qualified plans by exempting certain annuity features from actuarial tests that would otherwise prohibit their use.

Retirement Savings Lost and Found

The Labor Department will create a national online searchable lost and found database.

Military Spouses

Small businesses that provide immediate enrollment and vesting to military spouses in an eligible retirement savings plan will qualify for new tax credits.  This provision takes effect immediately.

These provisions represent just a sampling of the many changes that will be brought about by SECURE 2.0. We look forward to providing more details and in-depth analysis applying to both individuals and business owners in the future.  If you have any questions how SECURE 2.0 effects you and/or your business, please connect with us.

This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. If you would like information about your particular investment needs, please contact us. We do not provide tax, accounting, or legal advice. Clients should consult their own independent advisors as to any tax, accounting, or legal statements made herein