The Secure 2.0 Act, contained in the Consolidated Appropriations Act of 2023 was signed into law on December 29, 2022 with bipartisan support. The Act builds on the retirement savings changes made by the SECURE (Setting Every Community Up for Retirement) Act of 2019. This is a very broad piece of legislation addressing the need for greater retirement preparedness.
As this new year begins, whether you are close to retirement, or just starting your retirement plans, this is a great time to review new retirement provisions. Take a moment to review how some of the key changes may impact your retirement savings plans.
With close to a hundred provisions, a number of these will require time to implement. Especially those that involve employee based plans.
Key changes that may impact your retirement savings planning:
Effective in 2023:
Age for Start of Required Minimum Distributions (RMDs) Raised
- Raises the age for RMDs to age 73 years from 72 years.
- Beginning in 2033, RMDs start at 75 years of age.
- Effective January 1, 2023
Takeaway: The delayed starting age for RMDs allows more time for retirement accounts to grow. Anyone turning 73 in 2023 has until April 1st of 2025 to take this first distribution. Thereafter, the deadline is December 31st of each year.
Reduced Excise Tax for Missed Required Minimum Distributions (RMDs)
- Effective this year, the, excise tax for missing your RMD is reduced to 25% from 50%.
- If the RMD oversight is corrected within a one year period, the penalty will be reduced to 10%.
Takeaway: This is material tax relief from former punitive penalties. If you find that you have missed your RMD, review and correct as soon as you find the oversight, you may find that you may be subject to only a small tax penalty.
IRA Charitable Contributions – One Time New Charitable Gifting Opportunity
- A one-time option to make a gift of up to $50,000 into a Charitable Remainder Unit Trust (CRUT), a Charitable Remainder Annuity Trust (CRAT) or a Charitable GiftAnnuity for individuals 70 ½ years of age.
- Expands the definition of qualified charitable institution receiving a Qualified Charitable Distribution (QCD) for this one-time gift
- Effective January 1, 2023
Takeaway: If you are 70 ½ years of age or older and are charitably inclined, you may benefit from using your IRA to make a tax free distribution to the charitable organization. Charitable Gift Annuity may be attractive to consider as they can provide you or a designated spousal beneficiary defined annual payments for your lifetime with any remaining assets left to the benefiting charitable organization.
Roth Election Allowed for Employee Plan Matching Contributions
- Plan participants can elect part or all of their employee matching to be designated as a Roth contribution
- Effective January 1, 2022
Effective in 2024:
Spousal Beneficiary May Elect to Be Treated as Plan Participant
- The rule aligns with current treatment of IRAs for spousal beneficiaries
- Effective in 2024
Takeaway: The spousal beneficiary now has a choice of whether to be treated as the deceased spouse for the purposes of RMDs. The provision enables an older surviving spouse to delay first RMD distributions. In certain situations, it may also enable heirs of the surviving spouse some increased distribution flexibility.
Required Minimum Distributions (RMDs) will No Longer be Required from Employer Plan Roth Accounts
- Roth accounts in Employer sponsored plans will no longer be subject to minimum distributions during the participant’s life
- Effective starting 2024
Takeaway: This provision addresses the current inconsistency in Roth IRA requirements. As a result, Roth IRAs and Employer sponsored Roth accounts will receive the same treatment as Roth IRAs.
Catch-Up Contributions to Roth Plans for Higher Wage Earners
- For individuals earning over $145,000 catch up contributions will need to be made into a Roth plan account
- Effective starting 2024
Takeaway: Currently individuals age 50 and older can make catchup contributions on either a pretax or after tax, Roth basis. From 2024, higher earning individuals will need to contribute into a Roth Plan. Expect this trend continue, as Roth contributions, are seen as a valuable a source of tax revenue.
Qualified Charitable Distributions to be Inflation Adjusted
- The annual limit for Qualified Charitable Distributions will be indexed for inflation
- Effective starting 2024
Takeaway: As of 2024, the $100,000 limit on QCDs will be adjusted for inflation, which benefits those
who use their IRAs to make charitable tax free transfers. While you do not receive a
charitable deduction for your QCD, your contribution is transferred tax free.
529 Plan Assets will be Allowed to Rollover to Roth IRAs
- 529 Plan beneficiaries may rollover 529 Plan assets to Roth IRAs after 15 years, subject to annual contribution limits, and lifetime limit of $35,000. Currently, such non qualified withdrawals are subject to penalty
- Effective starting 2024
Takeaway: Good news if you are a 529 Plan beneficiary with unused funds, subject to contribution rules, you may be entitled to redeploy these towards your retirement savings in a Roth IRA. Roth IRA assets grow tax free, withdrawals tax free based on Roth rules with no RMD requirements either. This new flexibility is also great knowledge for those funding these for a child or grandchild.
Employees May Match Qualified Student Loan Payments
- Employers may treat qualified student loan repayments as elective deferrals and may make matching 401(k)/403(b)/ 457(b), 457(b) Plans and SIMPLE IRAs
- Effective starting 2024
Takeaway: This will be a new opportunity for those paying of student loan debt to also make headway
with retirement savings. Starting in 2024, employers will have the option to match qualifying
student loan payments subject to the terms of their Plan.
Effective in 2025:
Raises Catch up Contributions in Employer Retirement Plans
- Catch up contributions for employees 60-63 years of age of jobs to the greater of $10,000 or 150% of the age 59 catch up limit in 2024
- Will be indexed for inflation
- For higher wage earner individuals over 50 years of age, catch up contributions will be required to be made into a Roth Plan account.
- Effective starting 2025
Takeaway: In raising the contribution limits and indexing for inflation, it will be easier for those
approaching retirement to accelerate their retirement savings. The current limit for those
over 59 years of age is currently $7,500.
Automatic Enrollment into Employer Retirement Plan
- Requires automatic enrollment feature mandated for new businesses establishing 401(k)/403(b) plans
- Minimum contribution of 3% to maximum of 10%
- Effective starting 2025
Takeaway: This is just one of a number of new provisions, including Expanded Coverage for Part-time
workers that are intended to increase retirement savings participation and flexibility for
retirement savings.
Next Steps:
The recognition that individuals need to be better prepared for their retirement years is acknowledged by the sweeping changes to add greater engagement, opportunity and flexibility to retirement rules.
The passage SECURE 2.0 coincides with the beginning of this calendar year. It is an opportune time to review your retirement goals. Whether you are just starting your career or in your retirement years, these new rules may be of benefit to you.
We welcome the opportunity to help you use these new provisions to optimize your retirement plans. Please feel free to schedule a conversation with your relationship manager.
