SECURE Act 2.0 – The Sequel
On December 29, 2022, as part of an omnibus spending package, the bill known as SECURE Act 2.0 was signed into law. The original SECURE Act, passed in December 2019, included numerous changes to the retirement planning landscape, including an increase in the age when Required Minimum Distributions (“RMDs”) begin, limiting “stretch IRAs” to just 10 years instead of over the life expectancy of the beneficiary, and eliminating the age cap for IRA contributions by those who work beyond RMD age.
SECURE Act 2.0 builds on its predecessor in helping workers of all ages save for retirement. Most of the key provisions are effective in the 2024-2025 time frame, but smaller adjustments will be effective in 2023.
Below are some of the highlights:
- Beginning in 2023, the RMD age will increase from 72 to 73. For those turning 72 in 2023, this allows for an additional year of tax-deferred growth. In 2033, the RMD age rises to 75.
- The penalty for a missed RMD is reduced from 50% of the required amount to 25%. The penalty declines to 10% if corrective action is taken in a timely manner, generally believed to be before the end of the following year.
- Catch-up contributions for employer-sponsored retirement plans increase to $7,500 (from the current of $6,500) in 2023; starting in 2025, employees age 60-63 will be able to contribute the greater of $10,000 (adjusted for inflation) or 150% of the standard catch-up amount; beginning in 2024, the catch-up amount for IRAs, currently a flat $1,000, will be indexed for inflation.
- Employer-sponsored retirement plans established after 2024 with greater than 10 employees must contain automatic enrollment and annual escalation provisions, unless the employee opts out. Employees must be automatically enrolled at a contribution percentage of at least 3%, with a 1% increase every plan year until the contribution is at least 10%.
- SEP and SIMPLE IRAs can now accept Roth contributions; employers will have an ability to make Roth matching contributions; starting in 2024, high wage earners will only be able to make Roth catch-up contributions to employer sponsored plans.
- The requirement to take RMDs from Roth 401(k) accounts is eliminated beginning in 2024.
- Unused balances in 529 college savings accounts, up to a maximum of $35,000, can be rolled over into a Roth IRA for the 529 beneficiary.
- The IRA charitable rollover or qualified charitable distribution (QCD) limit of $100,000 will be indexed for inflation starting in 2024.
The above is not an exhaustive list of every provision in SECURE Act 2.0, which also provides for emergency distributions from employer-sponsored retirement plans, employer matching contributions for student loan payments, and increasing the portability of small retirement plan balances.
The Secure Act 2.0 is a very large piece of legislation that provides many potential planning opportunities in the years to come. However, it’s worth mentioning that many of the changes do not take effect until 2024, at the earliest. Additionally, custodians and employers will need lead time to update documents, policies, etc., to conform to the new law. Lastly, as we experienced with the 10-year stretch rule with inherited IRAs after the original SECURE Act, regulatory rules will need to be updated to clarify the bill. In short, there are no immediate action items to address with the new rules.
If you would like to discuss any of the changes in greater detail, please contact a member of your team here at West.
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