What would 2022 be without a last-minute bill making a breadth of changes to retirement plans? The SECURE Act 2.0 passed as part of a $1.7 trillion (yes, with a T) spending bill with the goal of broadening access to retirement plans to more U.S. workers. This bill expanded upon the first SECURE Act passed in 2019 and brings new rules around required minimum distributions, retirement plan contributions and enrollment, emergency withdrawals and savings opportunities, and more. Buckle up; there is a lot to review.

Changes to Required Minimum Distributions (RMD) Rules

With the passing of the SECURE Act 1.0 in 2019, owners of IRAs were required to begin taking a minimum distribution from their accounts annually starting the year they turned 72. Beginning in 2023, that age will move to 73 for individuals born in 1951 through 1959. Individuals born in 1960 or later will wait until age 75 to initiate their distributions.

Failing to take your RMD has historically carried a rather substantial penalty – 50% of your annual RMD amount. For 2023 and beyond, that penalty is decreased to 25% of the RMD and as low as 10% if corrected in a timely manner for IRAs. While this is a major reduction in penalty size, individuals should make sure their RMDs are completed before each year end to ensure they are not assessed a penalty.

Lastly, RMDs are no longer required for individuals with assets in a Roth 401(k) and 403(b). This change allows individuals to receive the same RMD-free advantage as Roth IRAs.

Retirement Catch-Up Contributions & Retirement Plan Auto-Enrollment

Savers over the age of 50 have traditionally had an extra $1,000 above the contribution limit for IRA contributions. Beginning in 2024, that limit will be indexed to inflation and could increase every year based on federally determined cost-of-living increases.

In 2025, an additional catch-up contribution will become available to participants in workplace retirement plans ages 60 to 63. Those individuals can contribute $10,000 above the regular contribution limit. This amount will be indexed to inflation as well. For workers earning $145,000 or more (based on the prior year’s wages), these contributions will be treated as Roth assets – taxed when contributions are made and tax-free when withdrawn.

One of the more controversial parts of the new SECURE Act is auto-enrollment for employees of companies with a defined-contribution plan (i.e., 401(k)s and 403(b)s). Studies have shown that companies that auto-enroll their employees in their retirement plans have had higher participation and contribution rates. Congress listened and is now making it mandatory. Effective in 2025, employers must automatically enroll new employees in their retirement plan starting at a minimum 3% contribution, increasing 1% annually to at least 10%, with a cap of 15%.

Keeping with the theme of giving savers more opportunities to participate in retirement plans, “Starter” 401(k) and 403(b) plans will be introduced in 2024. Designed to help small businesses provide a retirement plan for their employees at a lower cost, these “starter” plans will allow employees to defer funds from their paycheck as they would in a regular 401(k) plan. The difference will be that employers are not required to provide a matching contribution, and annual contributions will be subject to IRA contribution limits. Eligible employees would also be automatically enrolled at the minimum level of 3%, as mentioned above.

Expanded Roth Offerings & Flexibility

At RSWA, we have not been shy about our love for all things Roth – in fact, we wrote a whole article on them! Roth IRAs: 8 Essential Rules and Strategies to Know Congress apparently shares our love and has expanded opportunities for retirement savers to put more money into Roth assets.

Beginning in 2023, SEP and SIMPLE IRA owners are eligible to create SEP and SIMPLE Roth IRAs and contribute after-tax dollars. Employees receiving matching contributions from their employer into their employer’s retirement plan (including 401(k)s and 403(b)s) will also be able to receive their vested matching contributions to Roth accounts. All these will receive the same benefits of Roth IRA assets – tax-free when withdrawn and not subject to RMD requirements. It is important to note that electing to contribute to SEP or SIMPLE Roth IRAs or receiving your match in a Roth account will impact your taxable income as those accounts have historically been pre-tax. It also may take some time for plan and payroll services to update and start these offerings for employees.

529 College Savings Accounts have provided families with great opportunities to put money aside to pay for college costs for their students. One frustration of 529 accounts has been a lack of flexibility with unused funds. The SECURE Act 2.0 gives some options by adding 529 to Roth IRA transfers. Unused funds from a 529 can be transferred to a Roth IRA starting in 2024, but with limitations and rules.

• • The transfer is only allowed for the beneficiary of the 529, not the owner. So, if a child is the beneficiary of the 529, the money would have to be transferred to a Roth IRA in that child’s name. While this is a limitation, it does provide a great opportunity to help that child start saving for retirement.
    • The current law is unclear on exactly how a change in the beneficiary will be treated
  • The 529 account must be open for at least 15 years.
  • Contributions made to the 529 in the past 5 years cannot be transferred.
  • Annual transfer amounts are limited to the annual IRA contribution limit, and a lifetime limit of $35,000.
  • There is no income limit for transfers to the Roth.

Easier Access to Retirement Funds & Emergency Savings Funds

Retirement plans are designed for long-term savings and withdrawing money pre-retirement is discouraged. However, Congress does recognize that there are certain circumstances where early withdrawals are necessary. Because of this, they are adding the following features to ensure access to funds is available under these circumstances.

• • “Emergency Withdrawals” up to $1,000 begin in 2024. You must pay it back or wait three years before taking another emergency withdrawal.
  • Penalty-free distributions if terminally ill (defined as “death expected within 7 years”).
  • Victims of domestic abuse can take the lessor of 50% of the account balance or $10,000 beginning in 2024.
  • Penalty-free Qualified Long-Term Care Distributions up to $2,500 per year for long-term care insurance.
  • Reinstated Qualified Disaster Distributions retroactively to disasters on or after January 26, 2021. Limited to $22,000, and income can be spread over three years.

Along with easier access to retirement funds, emergency savings accounts in 401(k) plans will be available. These accounts are offered together with a retirement plan and designed to facilitate savings for short-term and unexpected expenses. Highly compensated employees won’t be eligible to contribute, the funds must be held in an interest-bearing cash account, contributions are limited to $2,500 annually, contributions may be eligible for an employer match, and the first four withdrawals in a year would be tax- and penalty-free. These accounts rollout in 2024.

Student Loan Repayment Provisions

Lastly, the SECURE Act 2.0 will aid individuals trying to save for retirement while also paying off their student loan debt, beginning in 2024. The bill will allow employers to contribute to workplace retirement plans on behalf of employees making student loan payments instead of contributing to their retirement plan. Essentially, you pay your student debt, and your employer can contribute to your 401(k). Matches must be made at the same rate as regular retirement plan contributions, and employees must certify to their employer that they have made the loan payments.

Summary

There is a multitude of new opportunities presented with the SECURE Act 2.0. However, it does come with many moving parts and different commencement dates. Here is the TL;DR (too long; didn’t read) summary:

2023

• RMD age pushed back to age 73 for individuals born 1951-1959
• RMD penalties reduced to 25% and as low as 10%
• SEP & SIMPLE IRAs allow Roth contributions
• Vested matching contributions in employer sponsored retirement accounts eligible to go into Roth accounts

2024

• IRA catch-up contributions indexed to inflation
• Starter 401(k) plans rollout
• 529 to Roth IRA transfers allowed
• Changes to emergency withdrawal requirements from retirement plans
• Emergency savings accounts can be established in workplace retirement plans
• Employees can receive a 401(k) for student loan payments

2025

• Catch-up contributions for individuals ages 60-63 increases to $10,000 for workplace retirement plans
• All new workers must be automatically enrolled employers’ retirement plan at a minimum contribution rate of 3%