The SECURE Act 2.0: It’s Complicated

By Macy Jae Moore on January 23, 2023

Written by: Zeke Anders

At the end of last year, Congress passed the Secure Act 2.0 with bipartisan support. The bill contains many provisions relevant to retirees and pre-retirees. The changes are generally beneficial and are meant to encourage saving for retirement. That said, the bill is very complicated, with different timelines for different changes. We’ll cover many of the changes below, with a summary at the end for convenience.

The change getting the most attention is regarding required minimum distributions. Starting January 1, 2023 the new age for starting required minimum distributions (RMDs) is 73. If you turn 72 this year, you do not need to take an RMD from your own IRA, as you did under the old law (inherited IRAs may be different). If you turned 72 last year, you’ll take another RMD this year by December 31st as usual. In 2033, RMDs will start at age 75. The penalty for missing RMDs is reduced from 50% of the RMD amount to 25%.

Starting in 2024, RMDs from Roth 401(k)s will no longer be required. This was a source of confusion in the past, because Roth IRAs are never subject to RMDs during the owner’s lifetime, but Roth 401(k) plans DO have to take RMDs. Under the new law, you’ll still be required to take an RMD in 2023 if you turn 73 or older during the year, but after 2023 you will not.

Starting in 2025, there will be higher catch-up contributions to workplace plans like 401(k)s and 403(b)s for people age 60 through 63. The catch-up contribution will be $10,000 total, indexed to inflation. Currently individuals age 50 or older can contribute an additional $7,500 to such plans. We don’t know why the extra catch-up is only available until age 63, apparently 4 years is enough to get everyone caught up. 

Starting in 2024, If you earn more than $145,000, catch-up contributions to employer plans must be made to a Roth account, in after-tax dollars. This will likely push more employers to offer Roth 401(k) options.

The IRA catchup amount for those age 50 and over, currently fixed at $1,000, will be indexed to inflation starting in 2024.

Employers will now be allowed to provide matching contributions to Roth accounts. Previously, if you contributed to a Roth 401(k), your employer had to provide matching contributions to a pre-tax, traditional 401(k) account.

Starting in 2024, 529 plans can be rolled over to Roth IRAs after 15 years, up to $35,000 per individual. This is a big change. Previously no amount of a 529 balance could be rolled into a Roth IRA or Traditional IRA. This made some people hesitant to fund 529 plans in case their child did not need the full balance, in which case the withdrawals would be subject to taxes and a 10% penalty. Allowing a $35,000 rollover after 15 years provides some buffer in case the whole balance is not used for qualified education expenses. However, the annual rollovers cannot exceed the annual Roth IRA contribution limit (currently $6,500 for those under age 50, $7,500 for those age 50 or over), so the entire $35,000 can’t be rolled over in one year. The beneficiary of the 529 must be the owner of the Roth IRA, but it is unclear if you can change the beneficiary before rolling the account over. All things considered, this is a nice backup option for excess 529 contributions, but has limited appeal as a deliberate planning strategy.

Roth contributions to SEP and SIMPLE IRA plans are now allowed. This option won’t likely be available in the real world for some time, as companies figure out how exactly to set up and offer these plans.

Starting in 2024, employers will be able to “match” employee student loan payments with contributions to a retirement account. The employee has to certify to the employer that they made payments on the loan, and the bill does specify “qualified student loans.” 

People age 70 ½ or older can now make a one-time qualified charitable distribution (QCD) up to $50,000 to a charitable remainder trust or charitable gift annuity, which counts toward their annual RMD. Note that the age limit for QCDs is still earlier than when RMDs are required to begin. Once you turn 70 ½ (and you must wait until you turn 70 ½, not just in the same calendar that you turn 70 ½), you can give up to $100,000 directly to charity without incurring income taxes. This is generally better than withdrawing the funds, paying taxes, and then claiming a deduction. It helps to reduce future RMDs by reducing the balance of the IRA, before future RMDs are calculated. If you are already planning to make charitable gifts and you are over 70 ½ years old, QCDs are a great way to give. The $50,000 one-time gift, allows you to gift a $50,000 remainder interest to charity, while collecting an income stream while you are living. Essentially, the charity gets whatever is left over when you pass. This is an advanced strategy that you’ll want to discuss with qualified legal and tax professionals. The $100,000 limit on QCDs is now indexed to inflation as well. 

The bill requires establishment of a national retirement savings “lost and found” database. Many workers change jobs several times in their careers, and some do not realize or remember that they or their employer were contributing to a retirement account. This database will help people find retirement accounts they may have forgotten about.

The SECURE 2.0 Act repeals the 25% of account balance limit on qualified longevity annuity contracts (QLACs), and raises the maximum premium amount from $145,000 to $200,000. Qualified longevity annuity contracts are deferred income annuities that can be purchased with 401(k) or Traditional IRA assets. When you purchase the annuity you elect a starting date for income, which can be as late as when you turn 85. There are no RMDs required on premium used to purchase the QLAC, which is sometimes touted as a benefit. However, with a QLAC you are essentially giving up the potential growth of those assets, in return for protected income later in life. If you are concerned about outliving your assets and lifetime income sounds appealing, a QLAC is an option, but if the only purpose is to delay RMDs, it may not be worthwhile.

Starting in 2023, victims of disasters and terminally ill persons can take withdrawals from their retirement accounts before age 59 ½ without a 10% early withdrawal penalty. For qualified disaster recovery distributions, the distribution must occur within 180 days of the disaster, and there is a lifetime limit of $22,000.

Starting in 2024, there are two new exceptions to the 10% early withdrawal penalty, domestic abuse, and financial emergencies. In both cases, the employee can self-certify, they don’t need other proof of the situation. The exception for domestic abuse is limited to $10,000 or 50% of the balance of the account, whichever is smaller. The distribution can be repaid within 3 years. There is a common misconception that 401(k) plans already allowed distributions for “financial hardship”. The reality is, most 401(k) plans will only allow withdrawals before separation of service for financial hardship, but those distributions still incurred the 10% penalty for early withdrawals. SECURE Act 2.0 changes that very slightly. Now, $1,000 can be withdrawn penalty-free for a financial emergency. Once you’ve taken this distribution, you can’t take another for 3 years or until the distribution is repaid. 

Along those lines, the bill allows employers to offer an emergency savings account within a retirement plan. Depending on the employer, employees can contribute up to $2,500 to this account which is treated as a Roth account. There is no 10% early withdrawal penalty for these accounts, which will be allowed starting in 2024.

There are numerous other changes in this bill, but many of them won’t apply to most people. While most if not all of these changes are positives for savers and retirees, they also make an already complicated retirement system even more complicated. If you have questions, please don’t hesitate to reach out.

Zeke Anders – Planning Specialist | zanders@twickenhamadvisors.com

Disclaimer

Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.