SECURE Act 2.0: Time for a Change
“The measure of intelligence is the ability to change.” – Albert Einstein, theoretical physicist
On December 23, 2022, Congress passed the Consolidated Appropriations Act of 2023. This 4,000+ page bill included the SECURE 2.0 Act of 2022, legislation affecting savers, investors, 401(k) participants, and almost every person who is retired or one day hopes to be. President Biden made it official on December 29, 2022, by signing the appropriations bill into law. SECURE 2.0 contains 92 new provisions providing more access to retirement plans and incentives for employers to provide this access.
- Changes to required minimum distributions (RMDs)
The SECURE Act of 2019, signed by President Trump December 20, 2019, raised the age for RMDs from 70½ to 72. SECURE 2.0 further raises the RMD age from 72 to 73 in 2023, and 75 in 2033. The policy behind this RMD rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. As a result of the change, this year, 2023, no retirement account owner will be required to begin taking RMDs in 2023 because of their age. If you were born in 1951 (age 71 last year, 2022, age 72 this year, 2023), you have no RMD this year. Your first RMD is next year, 2024, when you turn 73.
For individuals who already need to take distributions beyond their RMD level to support living expenses, the change is immaterial. For some clients, however, the change will be viewed as welcome news, as it may allow them to push off retirement-account income for a few more years to stave off higher Medicare Part B/D premiums and, perhaps, to have a few more years of tax-efficient Roth conversions.
- RMD Penalty Relief
The rules for retirement accounts are complicated. It should come as no surprise when it comes to such accounts, mistakes are pretty common. Thankfully, SECURE Act 2.0 includes a host of changes designed to limit the impact of various retirement account mistakes. The Act reduces the penalty for failure to take a RMD from 50% to 25%. Further, if a failure to take a RMD from an IRA is corrected in a timely manner, the tax penalty is further reduced from 25% to 10%.
- Permitting all employer contributions to be offered to employees on a Roth basis
Congress loves the Roth. Several SECURE 2.0 changes highlight Congress’s continued march toward ‘Rothification’, perhaps in an effort to snap up tax revenue now rather than in the distant future. Effective immediately, employers can allow employees to elect for some or all of their vested matching and non-elective contributions to be treated as Roth contributions under a 401(k), 403(b), or governmental 457(b) plan (though participants will be subject to income tax on such contributions).
- Catch-up contribution increase and changes for earners over $145,000
Under previous law, employees who have attained age 50 were permitted to make catch-up contributions in excess of the limits. The limit on catch-up contributions for 2023 is an additional $7,500, except in the case of SIMPLE plans for which the limit is $3,000. For individuals who have attained ages 60, 61, 62, and 63, Secure 2.0 increases these limits to the greater of $10,000 or 50% more than the regular catch-up amount in 2025.
All catch-up contributions to qualified retirement plans are subject to Roth tax treatment. An exception is provided for employees with compensation of $145,000 or less (indexed). Thus, effective in 2024, all catch-up contributions for individuals earning more than $145,000 per year (indexed) must be made on a Roth, or after tax, basis, and participants will be subject to income tax on such contributions.
In 2025 when both the Rothification provision and the enhanced catch-up contribution limits are effective, some 60- to 63-year-old plan participants will find themselves able to make larger catch-up contributions – but only to the Roth side of their plan.