SECURE 2.0 Act Paves the Way for Big Changes

The SECURE 2.0 Act of 2022 (“SECURE 2.0”) is chock-full of provisions – 92, in fact – aimed at improving Americans’ preparedness for retirement. Like SECURE Act 1.0 (passed December 2019), this latest round of legislation provides workers with greater access to retirement plans and further encourages retirement savings. This article highlights key provisions of SECURE 2.0 which are likely to have the greatest impact for savers (plan participants) and retirement plans going forward.

Access

For some Americans, not having access to a workplace retirement plan has perpetuated the challenges of planning and saving for retirement. Within SECURE 2.0, a provision will now provide multi-year tax incentives for smaller employers (generally with 50 or fewer employees) to adopt a new retirement plan. SECURE 2.0 has also introduced a provision which will require Automatic Enrollment and Automatic Escalation for new 401(k) and 403(b) plans beginning after December 31, 2024. While there are exceptions for certain types of plans (generally non-ERISA plans) and for smaller employers, mandating automatic features will help ensure more Americans are enrolled and actively saving in workplace retirement plans.

Some of the most meaningful provisions within SECURE 2.0 are designed to promote retirement savings.

• Increase in Catch-Up Contributions (effective for taxable years beginning after December 31, 2024)
  • Current catch-up contribution limits allow those age 50 and older to contribute an additional $7,500 (eligible plan) or $3,500 (SIMPLE) in 2023.
  • SECURE 2.0 will allow those within the age range of 60-63 to make additional catch-up contributions beginning in 2025 – the greater of $10,000 for eligible plans ($5,000 for SIMPLE plans) or 150% of the 2024 catch-up contribution limit (indexed for inflation).
  • It is important to note that, for participants taking advantage of catch-up contributions and whose wages exceeded $145,000 in the prior calendar year, SECURE 2.0 has mandated that such participants make catch-up contributions on a Roth (after-tax) basis (for tax years beginning after 2023). The wage threshold will be adjusted annually for inflation beginning in 2025.
• Further Expansion of Roth Retirement Accounts (2023)
  • SECURE 2.0 authorizes the creation of SIMPLE Roth IRA accounts and SEP Roth IRA accounts, allowing individuals additional flexibility in choosing whether to save for retirement on a pre-tax (‘traditional’) or after-tax (Roth) basis.
• Inflation Adjustments for IRA Catch-up Contributions (2024)
  • While IRA “regular” contribution limits have been indexed for inflation since 2002, the same has not been true for IRA catch-up contribution limits; beginning in 2024, IRA catch-up contribution limits will finally be indexed for inflation.
• Additional Flexibility for 529 College Savings Plans (2024)
  • One of the more unique surprises of SECURE 2.0 is the provision to allow unused 529 college savings funds to be rolled over directly to a Roth retirement account, beginning in 2024. The 529 account must have been maintained for at least 15 years; any contributions made to the 529 account within the prior five years are ineligible for a rollover; the receiving Roth account must be in the name of the 529 plan beneficiary; the annual limit for such rollovers is limited to the annual IRA contribution limit, less any other IRA contributions made for that same year; and the maximum allowable rollover amount is $35,000 during an individual’s lifetime.

Increased Savings

Expanded Distribution Options

While there are some “revenue boosters” included within SECURE 2.0, there are also many provisions geared toward helping participants keep retirement money invested longer.

• Required Minimum Distributions (“RMDs”) Extended (effective January 2023)
  • The RMD beginning age has gradually increased from age 70½ to 72 in recent years and will now expand further to age 75 over the coming decade.
    • RMD age 72 – individuals born in 1950 or earlier
    • RMD age 73 (starting in 2023) – individuals born between 1951-1959
    • RMD age 75 (starting in 2033) – individuals born in 1960 or later
  • Provision applies to Individual Retirement Account (“IRA”) holders as well
• Elimination of Pre-Death RMD for Roth Accounts (effective January 1, 2024)
  • SECURE 2.0 eliminates the pre-death distribution requirement for in-plan Roth amounts
  • This change does not apply to distribution amounts prior to the effective date
• Withdrawals for Certain Emergency Expenses (effective for withdrawals made after December 31, 2023)
  • In-service distributions from eligible retirement plans (401(k), 403(b) and 457(b) plans)
  • May withdraw up to $1,000 for emergency expenses (not subject to tax on early distributions)
  • Only one emergency expense (up to $1,000) is allowed per year
  • Distribution may be repaid within three years or future withdrawals may be limited
• Penalties for Missed Required Minimum Distributions (RMDs) (2023)
  • The penalty for not withdrawing the full amount of a required minimum distribution (RMD) will decrease from 50% to 25%, with a further reduction to 10% for taxpayers who correct the error in a timely manner.
• Inflation Adjustments for Qualified Charitable Distributions (QCDs) (2024)
  • The annual limit for QCDs has remained at $100,000 since its 2006 inception; beginning in 2024, the annual QCD limit will be indexed for inflation.
  • Also of note, while the RMD age will continue to rise over the coming decade, the eligible age for making a QCD remains at 70½.

Optional 401(k) Provisions

The SECURE 2.0 Act will also allow plan sponsors increased flexibility to add new optional features including matching of employee contributions with Roth dollars, treating student loan payments as elective deferrals that are eligible for matching dollars, and allowing emergency savings accounts that have more flexible withdrawal options than plans could offer in the past.

Summary

While this article touches on key themes of SECURE 2.0, there are many more provisions which will help redesign the retirement plan landscape to build a more sustainable and effective framework for employees to save and spend in retirement.

We will provide additional resources in the coming weeks. For any questions in the meantime, please reach out to a member of financial services team.

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