Secure Act 2.0 Highlights

President Biden signed the 2023 Consolidated Appropriations Act (CAA) into law on December 29, 2022. The law, which passed the House and Senate in late December 2022, respectively, contains significant changes to employer-provided retirement plans and individual retirement plans, referred to in the CAA as SECURE 2.0 Act of 2022 (SECURE 2.0). These provisions largely build upon the changes made under the SECURE Act, which was signed into law on January. 1, 2020.

Below are some of the key provisions under SECURE 2.0. While some changes are effective immediately, other changes will not go into effect until subsequent years through 2027. More importantly, as the Act was approved into law on December 29^th, some employer retirement plans may not yet offer the changes for 2023. It is important for individuals to confirm with their plan administrator to determine if 2023 updates are implemented in the plan. For a complete list of provisions, please reference the US Senate Committee on Finance website.

Here is a summary of some of the changes taking place immediately in 2023:

Required Minimum Distributions (RMDs)

• The age to start taking Required Minimum Distributions (RMDs) increases to age 73 in 2023 and to 75 for individuals who attain age 74 after 12/31/2032.
  • Currently taking RMDs (born prior to 1951) – no change to current RMD distribution, RMDs begin at age 72
  • Born between 1951-1959 – RMD increases to age 73
  • Born 1960 or later – RMD increases to age 75

Note: Delaying RMDs may not be the optimal withdrawal strategy in retirement; carefully consider tax rates when developing a distribution strategy from IRAs and 401(k) type accounts.

• The penalty for failing to take an RMD from an IRA or 401(k) like plan will decrease to 25% of the RMD amount, from 50% currently. The 25% penalty is further decreased to 10% if the required RMD is corrected in a timely manner.

Roth Employer Contribution Option. Effective immediately, employer defined contribution plans (401(k), 403(b), 457(b)) may provide participants with the option of receiving matching contributions on a Roth basis. Payroll taxes would more than likely be passed on to the employee for the matching dollar amounts received as Roth.

SIMPLE IRA and Simplified Employee Pension (SEP)  Roth Option. SIMPLE IRAs may now accept Roth employee contributions. Additionally, and plan permitting, a SEP may now allow a participant to have contributions treated as Roth.

Qualified Charitable Distributions (QCDs). Beginning in 2023, people who are age 70½ and older may elect as part of their QCD limit a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. This is an expansion of the type of charity, or charities, which can receive a QCD. This amount counts toward the annual RMD, if applicable. Note, for gifts to count, they must come directly from your IRA by the end of the calendar year. For an explanation on why a QCD might make sense, visit our recent charitable giving insights article.

Qualifying Longevity Annuity Contract (QLAC): Effective immediately, maximum lifetime QLAC premium increased to $200,000 (from $145,000 for 2022). Additionally, the up to 25% of total qualified retirement account (IRA, 401(k), 403(b)) balance limitation is removed.

Changes taking effect in 2024:

Catch up contribution – Roth for High Earners. Effective January 1, 2024, if you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the mandatory Roth requirement and will retain the option of contributing their catch-up contributions to pretax or Roth.

IRA Catch-up Amounts: IRAs currently have a $1,000 catch-up contribution limit for people age 50 and over. Starting in 2024, that limit will be indexed to inflation, meaning it could increase every year, based on federally determined cost-of-living increases.

529 Plan Roth Rollover. 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. The 529 account must have been open for more than 15 years, and the rollover is treated as a contribution towards the annual Roth IRA contribution limit.

Roth 401(k)/403(b)/457(b). RMDs will no longer be required from Roth accounts in employer retirement plans (401(k) like accounts). While Roth IRAs did not require RMDs, Roth 401(k)/403(b)/457(b) plans did prior to Secure Act 2.0.

Student Loan Debt Payment Match. Starting in 2024, employers will be able to “match” employee student loan payments to “qualified student loan payments” with matching payments to a retirement account. A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.

Changes taking effect in 2025:

Catch-up Contributions for 401(k), 403(b), Governmental Plans: Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 or 150% of the regular catch-up amount in 2024 (indexed for inflation) annually to a workplace plan. (The catch-up amount for people age 50 and older in 2023 is currently $7,500. Should the age 50 catch-up limit remain at $7,500 in 2024, the increased catch-up limit would be $11,250).

Items Not in Secure Act 2.0

• Limitations to Backdoor Roth – this remains a viable option for higher earners not eligible to contribute directly to a Roth IRA.
• Limitations on who can make Roth conversions on qualified tax deferred assets.
• Limitations on the “Mega Roth” 401(k) strategy
• Clarification on IRA Beneficiary 10-year rule to drain account and whether a beneficiary must take RMDs if the original account holder already started RMDs. We anticipate an IRS notice will come out early 2023 clarifying RMD rules for beneficiaries.
• Change to Qualified Charitable Distribution (QCD) eligibility which remains at age 70 ½.

Source: United States Senate Committee on Finance, US Senate Committee on Finance