SECURE Act 2.0 was signed into law on December 29, 2022 with bipartisan support in both the house and senate. The act comprises three retirement focused bills into one and builds on the original Act passed in 2019 (SECURE Act). There are nearly 100 provisions with some taking place immediately (1/1/2023) and others taking place in 2024, 2025, and 2033.

The overall goal of the Act is to address the difficulty Americans face when it comes to saving for retirement. According to Vanguard’s 2022 How America Saves study, the average 401(k) balance was $141,542 and the median account balance was merely $35,345 in 2021. The comprehensive Act includes RMD changes, automatic enrollment, increased contributions, retirement contributions tied to student debt, and penalty free hardship withdrawals to name a few. 

Required Minimum Distributions: 

• Individuals who turned 72 on or after 1/1/2023 will be required to take a Required Minimum Distribution (RMD) from their IRA beginning at age 73, rather than 72.  Beginning in 2033, the RMD age will increase to 75. 

(Planning opportunity: the increased RMD age will allow more years to do Roth Conversions with the goal of decreasing the tax burden in retirement.) 

• Beginning in 2023, the penalty for missed RMD will decrease to 25% (from 50%) or 10% if the individual corrects the mistake within 2 years. 

Employer Sponsored Retirement Plans: 

• Beginning in 2024 RMD’s from a Roth 401(k)/403(b)/457 Plans will be eliminated!

• Also, beginning in 2025 there will be an increase to catch-up contributions for individual participants who are between the ages of 60-63. The increased contribution will be an additional 50% of the current catch up. 

Example: Jane is 62 years old and she plans on maxing out her 401(k) and catch up contributions. Jane’s contributions will total $33,750 ($22,500 (max -out) plus $7,500 (catch -up for participants over the age of 50) plus $3,750 (increased 50% catch up) = $33,750).

(Planning opportunity: the increased catch-up contributions will allow for more funds to grow tax free and decrease adjusted gross income for four years.)  

However, if a participant earned more than $145,000 or more in the previous calendar year, then all of the catch-up contributions (beginning at age 50) will need to be made to a Roth IRA with after tax dollars. The $145,000 wage will be indexed for inflation. 

Example: John is a 55 year old CIO and makes $220,000 per year. Based on his current salary, he would be unable to make pre-tax catch-up contributions to his 401(k) in 2025. 

• The biggest challenge facing young employees from contributing to retirement accounts is their student-debt burden. Beginning in 2024, employers will have the option to match an employee's student loan payment with a contribution to their retirement account. The loan payments would act as the employees’ elective deferral. 

(Planning opportunity: the opportunity to save for retirement while also paying down student loan debt is vital to the overall well-being of the participants' future retirement fund.) 

• A Starter 401(k) Plan will be available beginning in 2024 for small businesses. The plan will require auto-enrollment (option to opt-out) and employee deferrals (no employer match required) limited to the IRA contribution limits. 

• Long-term part-time workers will be eligible for an employer sponsored plan after 2 years of consecutive employment (3 years previously) and 500 hours of participation. 

Penalty Free Withdrawals: 

During the pandemic, withdrawals and loans from retirement plans increased. In response to this phenomenon, the Act has provided a number of provisions allowing employees to withdraw from their accounts penalty free (previously a 10% penalty was applied to withdrawals if the participant was 59.5 or younger). 

• Employers will have the option to allow employees to create a “rainy-day-fund” within their retirement account. Individuals will be able to withdraw up to $1,000 penalty free for emergencies. This is limited to once a year. 

Qualified Charitable Distribution (QCD):

• The age at which a person can begin to make a QCD has not changed and remains at 70.5 years old. The maximum QCD amount is still $100,000 but will be indexed to inflation beginning in 2024. 

(Planning opportunity: A QCD is not only a great way to satisfy charitable goals but can also reduce the taxpayer’s required minimum distribution and AGI!)  

Example: Jack is 78 years old and his required minimum distribution for the year is $180,000. He is very passionate about birds and the local arts so he does two QCD’s in the amount of $40,000 each to the charities supporting his passions. Jack’s tax liability is now $100,000 as opposed to $180,000 if he chose not to do QCD’s. 

• Historically, QCD’s could only be granted directly to qualified 501c3 charities but at the start of 2023 individuals are able to take advantage of the One Time Split Interest Entity provision.  Taxpayers can use a QCD to fund a Charitable Remainder UniTrust (CRUT), Charitable Remainder Annuity Trust (CRAT), or Charitable Gift Annuity (GCA) once in their lifetime and the amount cannot exceed $50,000 (indexed to inflation). 
  

Other Noteworthy Provisions:

• The beneficiary of a 529 account can roll over $35,000 to their Roth IRA. The $35,000 is a maximum lifetime rollover amount and the annual contributions cannot exceed the maximum 

• Roth IRA limits (i.e. for 2023 an individual can contribute a maximum of $6,500 to a Roth IRA). The 529 account must be in existence for at least 15 years to take advantage of this opportunity. 

• The IRA catch-up of $1,000 for those over age 50 will be indexed to inflation beginning in 2024. The inflation adjustment will be made in increments of $100.

• SIMPLE IRA and SEP IRA Retirement plans are now authorized to include SIMPLE Roth and SEP Roth (previously these plans only allowed for pre-tax funding). This particular provision has already taken place. 

• Lost and Found National Database will be created to help individuals find all employer sponsored retirement accounts (401(k), 403(b), 457). The Department of Labor is tasked with establishing this database and should be completed by the end of 2024. 

The many provisions to the SECURE Act 2.0 have created some advantageous and some unfavorable planning opportunities. As always, if you’re a Westview client, please reach out to us anytime for more information.