SECURE Act 2.0 Passes: An Overview

On December 29, 2022, as a part of the government’s year-end spending bill, President Biden signed into law the SECURE 2.0 Act of 2022 (SECURE 2.0). SECURE 2.0 builds on the reforms in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, the most sweeping changes to the U.S. private retirement system in over a decade.

On its way to the President’s desk, SECURE 2.0 carried support from both major political parties and both houses of Congress. This Act makes it easier for employers to sponsor retirement plans for their employees and easier for employees to save more for retirement.

The sweeping legislation has dozens of significant provisions, so to help you see what changes may affect you, I broke the major provisions of the new law into four sections.

New Distribution Rules

RMD age will rise to 73 in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). And starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. But if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.¹

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can get up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.²

Reduced penalty. Also, starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake promptly, the penalty may drop to 10%.³

New Accumulation Rules

Catch-Up Contributions. Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually.⁴

Automatic Enrollment. Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. However, employees can choose to opt-out.⁵

Student Loan Matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.⁶

Revised Roth Rules

• 529 plan to Roth IRA rollovers

To help alleviate parents’ fears about over-funding 529 college savings accounts, the Act enables penalty-free rollovers from 529 college savings plans to Roth IRAs, with limitations:

• The lifetime rollover limit is $35,000
• The annual rollover limit is pegged to the yearly IRA contribution limit, which includes contributions made to any IRA. In addition, the amount rolled over plus annual IRA contributions cannot exceed the designated beneficiary’s earned income for the year.
• The individual must be the designated beneficiary of the 529 plan and move funds to a Roth IRA in their name
• The 529 accounts must have been opened for at least 15 years
• Contributions and earnings made within the last five years are not eligible for rollover
• The amount rolled over is tax-free (not included in the beneficiary’s income) and penalty-free

This is one of the most significant changes in the Secure Act 2.0 as it is an entirely new rule. Potential planning opportunities exist, though further guidance from the IRS is needed. For example, does the 15-year account seasoning period reset when a new beneficiary is named? If the lifetime limit only applies to the beneficiary doing the rollover, not the 529 account, the same account could accommodate multiple rollovers — as there are currently no limits on naming new beneficiaries, their age and so on. So, it’s clear there may be some new planning opportunities on the horizon. The ability to do 529 plan to Roth IRA rollovers goes into effect in January 2024.

• No required minimum distributions (RMDs) in Roth 401(k) plans

Prior to the passing of Secure Act 2.0, only Roth IRAs allowed the original account owner to skip lifetime RMDs. Employees who saved in a Roth 401(k), and never rolled the funds over to a Roth IRA were still subject to mandatory withdrawals at RMD age.¹

Starting in 2024, individuals who left assets in a Roth employer plan won’t be subject to mandatory distributions during their life. However, for the beneficiary, this is still a different story.

As with any financial decision, there are pros and cons to leaving money in an employer plan versus rolling it over. Though most investors prefer consolidation, bypassing RMDs on Roth 401(k)s eliminates a significant drawback for those with Roth accounts wanting to stay in plan.

• Catch-up contributions are required to be Roth

Another major change in Secure Act 2.0 is the requirement that plan participants age 50-plus make catch-up contributions to a Roth account.² Currently, pre-tax or Roth contributions are allowed. The new rule offers an exception for workers who earned less than $145,000 (indexed) the previous year for the same employer.

As currently written, this poses a planning opportunity for individuals older than 50 who change jobs mid-year as they may be eligible for pre-tax catch-up contributions for another year or two before triggering the compensation limit for the prior year. The changes will apply to 401(k), 401(a), 403(b), and 457(b) plans starting in 2024.

Of course, individuals older than age 50 are usually entering their highest earning years, so no longer being able to exclude $7,500-plus from income will end up costing most high earners in the form of higher taxes for the year. This is another part of the Secure Act 2.0 that presents significant hurdles for small employers. The Act stipulates that unless a plan allows catch-up contributions in Roth accounts, then no one in the plan can make catch-up contributions. Due to the added administration and expense of permitting Roth contributions, many small 401(k) plans don’t currently offer a Roth option.

• Optional treatment of employer contributions as Roth

Before the passing of the Act, employer funding could only be pre-tax. Now, effective immediately, plan sponsors may choose to offer non-elective or employer-matching contributions to Roth accounts. Employers offering matching based on student loan payment may also apply contributions to Roth accounts.

All employer funds treated as Roth will be immediately 100% vested. But note that the employer’s Roth contribution will be included in the employee’s gross income for the year. This potentially creates a liquidity crunch if employer contributions are significant, as the employee doesn’t get any extra cash to pay the tax.

Although employer Roth contributions can start immediately, it will take time for employers and administrators to catch up. Given the other sweeping changes in Secure 2.0, it will take some time for plans to digest the new provisions.

• SIMPLE and SEP IRAs may now accept Roth contributions

Before the passing of the Act, SIMPLE IRAs and SEP IRAs could only accept pre-tax funds. Now, for tax years starting in 2023 (e.g. now), both SEP and SIMPLE IRAs can offer a Roth options. The IRS must still pave the way for this by issuing additional guidance. Then, employers need to update plan documents, so again, it may take time to truly be in effect.

More Highlights

Support for Small Businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.¹⁰

Qualified Charitable Donations (QCD). From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is 70½ years old and older can make a QCD as long as it remains under the limit.¹¹

Planning for change

The Secure Act 2.0 is just another massive change in tax law in the last few years. Starting with the 2017 Tax Cuts and Jobs Act, then the 2019 Secure Act 1.0, it’s clear that investors need to be adaptive in tax planning. At the very least, the Secure Act 2.0 illustrates the importance of revisiting your retirement and tax planning strategy annually. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.

Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It's not intended as a substitute for real-life advice.  There is a LOT to unpack in Secure Act 2.0 in the days, weeks, and months to come. And keep in mind, Congress makes the laws but often, the IRS must interpret and apply them. It sometimes takes a while to sort everything out. So stay tuned!