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What Does the SECURE 2.0 Act Mean for Retirement Strategies?

The SECURE 2.0 Act became law at the end of 2022 as part of Congress’ omnibus spending bill. Read on to see how parts of the law relate to retirement planning.
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With the president’s signature on December 29, the widely anticipated SECURE 2.0 Act of 2022 became law as part of the omnibus spending bill passed by Congress. The legislation outlines a wide variety of updates to retirement plan rules for individuals and plan sponsors alike. Some of the changes take effect in 2023 while other changes phase in over the next several years. 

The below synopsis highlights several noteworthy provisions of the law. As with the original SECURE Act that became law in December 2019, it will be some time before we know exactly how specific details of the law will be administered as we await official guidance from the IRS. We have not highlighted the numerous provisions in the legislation that are geared toward administration of employer-sponsored retirement plans nor have we provided an exhaustive list of the changes that will impact individuals.

IRAs are seeing numerous changes, including:

  • Catch-Up Provisions – Beginning in 2024, IRA owners’ annual catch-up contributions from age 50 onward will be indexed for inflation annually from a starting amount of $1,000.
  • Early Withdrawals – With limited exceptions, withdrawals from retirement plans prior to age 59 ½ are subject to a 10% penalty on top of any income tax due on the withdrawal. The legislation has added additional exceptions that are free from the early withdrawal penalty. Those additional exceptions include:
    • Terminally ill account holders
    • Domestic abuse survivors, up to $10,000, beginning in 2024
    • For payment of specific types of long-term care policy premiums, up to the lesser of 10% of the account balance or $2,500, beginning in 2026
    • For survivors of federally declared disasters, up to $22,000, and special rules allowing for the taxation of these withdrawals to be stretched over three years
  • Required Beginning Date (RBD) for Retirement Accounts – Individuals who retire with a traditional 401(k) or IRA may make penalty-free withdrawals from those accounts after reaching age 59 ½. Previously, account holders were obligated to begin taking required minimum distributions (RMDs) annually beginning in the year they turn 72. This provision is designed to ensure that these account owners begin to draw on the balance of the accounts and, therefore, pay income tax on those distributions. The SECURE 2.0 Act delays the RBD from age 72 to age 73 as of January 1, 2023, and age 75 in 2033.
  • Reduction in Penalty for Failure to Take RMD – The penalty for the failure to take an RMD is reduced from 50% to 25%. Further, if this mistake is corrected in a timely manner, this penalty can be further reduced from 25% to 10%. Although having a reduced penalty is positive, it is best to avoid the penalty altogether!
  • Qualified Charitable Distributions (QCDs) – IRA owners over age 70 ½ are permitted to make contributions from their IRA directly to charitable organizations up to $100,000 annually without recognizing the QCD amount as income. Under the SECURE 2.0 Act the annual limit is now indexed for inflation. Historically, QCDs have not been permitted from a retirement account to a charitable trust. Under the new legislation, a one-time QCD up to $50,000 will be allowed for specific types of charitable trusts, but it carries with it a number of restrictions and requirements.
  • Rollover from 529 Plan to Roth IRA – New to the retirement plan landscape is a provision in the SECURE 2.0 Act that allows for limited rollovers from 529 Plan accounts to Roth IRAs. Beginning in 2024, the law allows a lifetime maximum of $35,000 to be rolled over from a 529 account that has been open for at least 15 years to a Roth IRA owned by the 529 account beneficiary without taxation or penalty. Since this provision is completely new, much is yet to be understood about how it will work in practice. Other rules and requirements are likely to become more clear following IRS implementation of the provision.

Items of note regarding qualified plans include:

  • Automatic Enrollment & Escalation – The SECURE 2.0 Act requires all 401(k) and 403(b) plans to automatically enroll participants' plans upon eligibility. The initial deferral percentage will be a minimum of 3% of compensation, increasing annually 1% until a minimum deferral of 10% is reached. This is effective for all new plans beginning after December 31, 2024.
  • Catch-Up Provisions – Congress has updated the provisions that allow for 403(b) and 401(k) account owners to make catch-up contributions to their accounts, above normal annual limits once they reach age 50. Under the new law, beginning in 2025, 401(k) and 403(b) account holders age 60 through 63 can make an increased annual catch-up contribution limited to the greater of $10,000 or 50% more than the regular catch-up amount, indexed for inflation. The catch-up contribution limit in 2023 for all other 401(k) and 403(b) participants over age 50 is $7,500. 
  • Student Loan Payments & Matching Contributions – In an effort to allow those paying down student debt to also save for retirement, the SECURE 2.0 Act allows an employee to receive available matching contributions by way of paying down student debt. The SECURE 2.0 Act permits an employer to make matching contributions under 401(k), 403(b), or SIMPLE IRA with respect to “qualified student loan payments.” This benefit will be effective for contributions made for plan years beginning after December 31, 2023.  
  • Elimination of RMDs for Roth 401(k) Plans – The SECURE 2.0 Act has also eliminated the requirement for Roth 401(k) owners to take RMDs from those accounts beginning in 2024. Roth IRAs continue to have no RMD requirement for account owners. It should be noted that beneficiaries of a decedent’s Roth IRA or Roth 401(k) are subject to withdrawal requirements.

FORVIS Private Client™ can aid you in making well-informed decisions as you work toward achieving your goals throughout your lifetime and through the ever-changing legislative landscape. We invite you to reach out to your advisor or submit the Contact Us form below to have a conversation about how the SECURE 2.0 Act may affect your strategies moving forward.

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