SECURE Act 2.0
April 10th, 2023
In 2019, the federal government passed the Setting Every Community Up for Retirement Enhancement Act—more commonly known as the SECURE Act, the predecessor to the SECURE Act 2.0. That legislation made important modifications to laws affecting retirement savings, with the goal of making it easier for more Americans to save for retirement, and to build a larger nest egg over a longer period of time. The SECURE Act accomplished this goal in part by giving people a longer period in which to contribute to an Individual Retirement Account (IRA) and allowing them to wait longer before taking an initial required minimum distribution from retirement accounts such as IRAs and 401(k)s.
Now, just a few years later, there is a SECURE Act update. The new law, dubbed SECURE Act 2.0, is designed to further strengthen Americans’ opportunities to save money for retirement. SECURE Act 2.0 passed as part of the Consolidated Appropriations Act of 2023 and has numerous provisions to help taxpayers. Here are some of the ones that may be most relevant to you and your family.
RMDs: When to Take Them, and Penalties if You Don’t
The original SECURE Act delayed the age at which you had to take your initial required minimum distribution from a retirement account, pushing it back to 72. SECURE Act 2.0 keeps moving the age up: to 73 as of January 1, 2023, and to 75 in 2033. That doesn’t mean you can’t take your initial RMD sooner, it just means that you don’t have to—and there have been some pretty steep penalties for failing to take an RMD in a timely fashion.
The good news is that, while there are still penalties (it’s a required minimum distribution, after all), they are no longer as grim. Failing to take your RMD in 2022 meant that you paid a penalty of 50% of the distribution you didn’t take. That could be thousands of dollars! But thanks to SECURE 2.0, the penalty for not taking an RMD is 25%; still high, but not quite as bad. And if you were supposed to take an RMD from an IRA, the penalty falls to 10% if you promptly take the distribution and file an amended income tax return.
There is more good news. For retirees with in-plan annuities, if the amount of the annuity is greater than the amount of the RMD, the difference can be applied to that year’s RMD. Also, Roth accounts that are a part of an employer-sponsored retirement plan will be completely exempt from RMDs beginning in 2024.
Automatic Enrollment and Portability for Retirement Plans
Beginning in 2025, employers who establish a new 401(k) or 403(b) retirement plan for employees will have to have default automatic enrollment for all eligible employees. This takes the burden off of employees, especially younger employees who may not realize the benefits, to enroll in a plan. Initial contributions must be between 3% and 10% of pretax earnings, with an automatic increase of 1% each subsequent year until the contribution is between 10% and 15% of the employee’s compensation.
Certain employers, such as newly-established small businesses with 10 employees or fewer are exempt from the automatic enrollment requirement. Employees also have the option of opting out of contributing to a retirement plan, or may choose to make a contribution in a different amount than the default.
When an employee leaves a job, it is not uncommon for them to “cash out” a retirement account. SECURE Act 2.0 allows service providers for retirement plans to offer plan sponsors automatic portability services. This would allow an employee’s accounts to be transferred to a new plan upon changing jobs.
More Options for Catch-Up Retirement Savings
Older workers who are closer to retirement can contribute an additional amount (over and above standard contribution limits) to their retirement accounts each year to build their savings. SECURE 2.0 increases these “catch-up” contributions to allow older workers to save even more.
If you are between the ages of 60 and 63, you will be able to make catch-up contributions to an employer-sponsored plan of up to $10,000 per year (indexed to inflation) or 150% of the standard catch-up contribution, whichever is greater, as of January 1, 2025. IRAs currently have a catch-up contribution of $1,000 for workers over 50; beginning in 2024, that catch-up amount will be indexed to inflation.
One note of caution: income limits may influence how you can make your catch-up contributions. If you are over 50 and earned more than $145,000 in the previous year, you can only make contributions to a Roth account using after-tax dollars, meaning those contributions are not tax-deductible. The $145,000 income limit will be indexed annually to inflation.
New Student Loan Matching
Younger, college-educated workers with student loans have (understandably) often been more focused on making loan payments than saving for a retirement that is decades away. Good news for those workers: thanks to SECURE 2.0, starting in 2024, their employers can match their student loan payment with contributions to a retirement account in the same amount.
New Qualified Charitable Distribution Opportunities
Qualified charitable distributions, or QCDs, let charitable-minded IRA owners donate to their favorite eligible charity directly from their account instead of taking an RMD. The advantage of doing this is that the distributed funds are never in the account holder’s hands; they go directly to the charity, and are not taxed as income.
SECURE Act 2.0 allows individuals who are 70 ½ or older to make a one-time gift of as much as $50,000 to a charitable remainder annuity trust (CRAT), charitable remainder unitrust (CRUT), or a charitable gift annuity. The maximum gift amount will be indexed to inflation. Previously, gifts to these entities were not permitted as QCDs. If you are interested in making a one-time gift as a QCD, consult with your estate planning attorney to be certain your charity or trust qualifies for this opportunity.
Expanded Use of 529 Plan Funds
Many families have taken advantage of the availability of 529 plans to help their children and grandchildren pay for college and, more recently, education at K-12 schools. SECURE Act 2.0 now expands the potential use of 529 plan funds to create an IRA for the beneficiary.
Starting in 2024, and subject to limitations, taxpayers may convert up to $35,000 from a 529 plan to an IRA on behalf of a beneficiary of the plan. What are the limitations? The 529 plan must have existed for over 15 years prior to the conversion of funds into an IRA; the rollover amount cannot exceed the total contributions to the plan in the preceding five years; and the amount must be transferred directly to the IRA from the 529 plan. The rollover amount cannot exceed applicable contribution limits when combined with other contributions to the IRA.
The SECURE Act 2.0 summary above represents only a portion of what the law has to offer. To learn about other opportunities, contact Gudorf Law Group to schedule a consultation.