On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023, which is wrapped into the Securing a Strong Retirement Act, commonly called SECURE 2.0. This package of laws is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. SECURE 2.0 covers many changes to retirement provisions created to increase retirement savings, increase access to retirement savings, encourage employees to save for retirement, and lower employers’ cost of offering and funding retirement savings plans. The majority of the SECURE 2.0 provisions will become effective in 2024.

Depending on your age and financial circumstances, the bill offers different benefits to different people. Read on to see what it means to you. This discussion highlights some, but not all, of the new provisions in SECURE 2.0 that will take effect in 2023 and 2024.

New RMD Start Date.

SECURE 2.0 pushes back the beginning date for required minimum distributions (RMD) from qualified plans. Individuals turning age 72 during 2023 or later will start their RMD at age 73. For those reaching age 74 after December 31, 2032, their start date is age 75. In 2022, that RMD start age was 72 years old. The new legislation pushes it back a year immediately so that in 2023, you won't have to start required minimum distributions until your 73rd birthday.

For those that don’t need to withdraw these funds at the current younger RMD age, retirement savings may continue to grow and provide greater income in their later years.

RMD Penalty Relief.

Secure 2.0 provisions changed the penalties if you don't take your required minimum distribution on time. These were probably among the nastiest penalties in the tax system…50% of what you should have withdrawn.

If required minimum distributions are not taken, the excise tax penalty is reduced to 25% for taxable years beginning in 2023. The penalty is further reduced to 10% if correction is made within two years after the end of the taxable year in which the distribution was missed.

This mostly benefits people who made a mistake. While this change makes an error less costly, be sure to take your RMD’s on schedule and avoid any penalties.  

Catch-up Contributions.

Individuals over age 50 can contribute a salary reduction catch-up contribution to an employer plan. This contribution is currently limited to $6,500 annually. For tax years beginning after 2024, employees who are 60-63 years old can take advantage of a higher catch-up contribution of $10,000. SECURE 2.0 provisions also index the IRA catch-up contribution for individuals over age 50. The current catch-up amount is $1,000, but this amount will increase for cost-of-living adjustments in tax years beginning after 2023.

SECURE 2.0 requires that catch-up contributions be designated as Roth contributions for any plan participant whose wages exceed $145,000, effective for tax years after 2023. In addition, employers can make matching and non-elective contributions to designated Roth accounts instead of traditional pre-tax accounts.

Annuity Investment Option.

SECURE 2.0 facilitates an employer’s ability to include annuity options in a plan. Plan participants in account balance plans (such as a 401(k)) may want to use a portion of retirement plan savings to purchase an annuity, which provides a guaranteed lifetime income stream. Prior to SECURE 2.0, employer plans were constrained in allowing participants to purchase annuities in their accounts. The new law directs the IRS to modify its regulations within 18 months to allow for more relaxed rules around the payment of premiums for an annuity, and how the annuity’s annual payment is considered in the determination of the participant’s RMD. We’ll see how this develops and whether there is much benefit besides making it easier for participants. Currently, you can always use rollover dollars to purchase annuities.

529 Accounts

This is an interesting and unexpected benefit of SECURE 2.0. The new legislation allows for people, if you have a 529 account for a beneficiary and it's been open for 15 years or longer and you have unused money in there (maybe your kid got a scholarship, or they went to a less expensive school, or didn’t go to school at all, or your investments did better over the long run than you expected). Whatever the reason, if you have extra money left over in that 529 account, the new legislation gives you the ability to roll that over into a Roth IRA account for the beneficiary. It is subject to two limits. One is that each year you are subject to the annual limit on Roth contributions. That would end up being $6,500. No more than that in any one given year. There's also a lifetime limit under the legislation. That is $35,000. But that's a big deal. Under current law, if you had unused 529 money, you could change the beneficiary to another kid if you want. But if you took it out, you'd pay tax on the amount you took out and potentially a 10 percent penalty as well because it was not being used for an educational purpose.

Other Provisions

-SECURE 2.0 also allows plan participants to withdraw up to $1,000 annually for meeting unforeseeable or immediate family needs relating to personal or family emergency expenses. The distributions are not subject to the 10% penalty for early withdrawal for those that have not reached age 59 ½. Only one distribution can be made per year. An employee can repay the amount to the plan within three years.

-Under SECURE 2.0, your employer can make a matching contribution to your retirement plan account based on your student loan payment amount. This is designed to address the fact that high student loan debt can keep people from saving for retirement. This will become effective in 2024.

- Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.

Many of the changes benefit those near or living in retirement. Other provisions impact the design of plans which will encourage younger investors just starting out to participate in an employer plan. While these changes will stop far short of solving our nation’s retirement crisis, it’s a step in the right direction. Remember that you control your retirement journey, and you need to make good decisions along the way.

Enjoy the Journey.