What the SECURE Act 2.0 Means for Your Retirement (Hint: It’s Probably Less Than You Think)

In 2019, Congress passed the SECURE Act, which raised the beginning age for Required Minimum Distributions (RMDs) from 70 1/2 to 72 and effectively killed the “stretch” IRA, among other things. And perhaps in another few years, we will have a SECURE Act 3.0 to decipher, but for now let’s take a moment to cover some of the highlights of the SECURE 2.0 Act intended to make retirement planning and saving easier for Americans.

Keep in mind, the SECURE 2.0 Act is about 350 pages of a 4,000+ page omnibus bill that was passed in late December 2022. Within it are over 150 provisions, most of which will not affect our WillKate clients. Here are some changes you may find of interest, though.

• RMD Age Pushed Back (Again)

Three years ago, SECURE Act 1.0 increased the age for taking the required minimum distribution, or RMD, to 72 years from 70½. If you turn 72 this year, the age required for taking your RMD rises to 73 with SECURE Act 2.0.

If you turned 72 in 2022, you’ll remain on the prior schedule.

If you turn 72 in 2023, you may delay your RMD until 2024, when you turn 73. Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1, and the second no later than December 31.

Starting in 2033, the age for the RMD will rise to 75.

• RMD Penalty Relief

Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And 2.0 goes one step further. If the RMD that was missed is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%.

But let’s be clear, while the penalty has been reduced, you’ll still pay a penalty for missing your RMD.

• Expands Automatic Enrollment in Retirement Plans

The Secure Act 2.0 adds more specific guidelines for employers to implement automatic enrollment in newly established 401(k) and 403(b) plans for eligible employees.

Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to automatically enroll employees at a rate between 3% and 10% of their salary.

The new legislation also allows for automatic portability, which will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out.

In order to encourage employees to sign up, employers may offer gift cards or small cash payments, like a signing bonus.

Employees can still opt out of the employer-sponsored plan.

• 401(k) Catch-up Contribution Limit Increased for ages 60 to 63

Currently, the catch-up contribution limit for 401(k) plans is $7,500 for plan participants aged 50 and older. Starting in 2025, the SECURE Act 2.0 increases the limit for participants aged 60 to 63, allowing catch-up contributions of $10,000 or 50% above the standard catch-up limit, whichever is greater. After 2025, the new catch-up limit will be indexed to inflation.

Catch-up dollars are required to be made into a Roth IRA unless your wages are under $145,000.

• Various Roth Changes

There were quite a few changes to Roth accounts, including:

1. Elimination of RMDs for employer-sponsored Roth accounts, such as Roth 401(k)s and Roth 403(b)s, to align with individual Roth practices. (effective 2024)
2. Establishment of Roth versions of SEP and SIMPLE IRAs. (2023)
3. Ability for employers to make contributions to traditional and Roth retirement accounts. (2023)
4. Ability to move 529 assets into a Roth IRA. (2024)
5. For employees who are 50 and older with more than $145,000 (inflation adjusted) in wages from the previous year, they must designate their catch-up elective deferrals as Roth contributions. If the employer doesn’t have a Roth option, then the employee cannot make a catch-up contribution. (2024)
6. Exemptions from required Roth contribution for catch-up include self-employed individuals and IRA catch-up contributions. (2024)

If you’ve already begun taking Roth RMDs, you should be able to stop doing so in 2024. What has not changed about Roths, although there’s been talk that it might, is that there are still no restrictions on “backdoor Roth conversions” and similar strategies. Note, there may be a delay in establishing these new types of Roth accounts (SEP and SIMPLE) to allow for custodians and the IRS to implement the necessary rules and procedures.

• Charitable Contributions

Starting in 2023, SECURE 2.0 allows a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. One must be 70½ or older to take advantage of this provision.

The $50,000 limit counts toward the year’s RMD.

It also indexes an annual IRA charitable distribution limit of $100,000, known as a qualified charitable distribution, or QCD, beginning in 2023.

• Back-door Student Loan Relief

Starting next year, employers are allowed to match student loan payments made by their employees. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement.

• Unused 529 Plan Funds may be Rolled into a Roth IRA

Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary. The 529 plan must be at least 15 years old.

In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.

What to Do Now

As we mentioned, this “Act” is just a small piece of a much larger bill, so if you experience any significant life changes, please keep us aware of them so we can help you make the best decisions going forward.

Will the SECURE 2.0 Act change how you prepare for retirement? Probably not. For those of you who have been saving and preparing for retirement diligently over decades, some of these provisions may impact you to some degree now or down the road, but they are unlikely to fundamentally change your approach.

Of course, if you have questions or concerns, we are always here to address them. Simply call the office or send us an email to schedule a time to connect.