In December of 2019, Congress passed the SECURE (Setting Every Retirement Up for Retirement Enhancement) Act, which became law on January 1, 2020 – a previous newsletter of ours detailed the changes laid out in that piece of legislation.  As of January 1, 2023, the SECURE Act 2.0 was enacted, creating a number of new changes to various aspects of retirement law.  SECURE 2.0 covers a lot, so I’ve broken down the key changes within each major aspect of retirement law below: 

Required Minimum Distributions (RMDs)

In the first part of the SECURE Act, the age that RMDs began for pre-tax retirement accounts was raised from 70 ½ to 72.  SECURE 2.0 raises that age to 73 for those born between 1951 and 1960, and then further raises it to age 75 for those born after 1960.  As a side note, this creates an interesting situation in 2023, as it will be a year where no one will need to begin taking RMDs.  Since those born in 1951 will be turning 72 this year, and the RMD age has increased to 73 as of January 1, there will be no new people hitting RMD age this year.

While the RMD age has been increased again, the age at which Qualified Charitable Contributions (QCDs) can begin has remained at 70 ½.  QCDs are direct contributions to charities from a pre-tax IRA.  QCDs allow for reduction of RMDs in a given year without incurring tax liability, but obviously, those dollars must go to charity.  With QCDs still being allowed at 70 ½, one can reduce their IRA value before RMDs begin, thereby reducing their RMDs and annual tax liability.  The annual QCD amount will also be indexed to inflation going
forward, rather than being capped at $100k per year.

Along with the increase in the RMD age, the penalty for missing an RMD has also been reduced from 50% to 25%.  To clarify, if an RMD isn’t taken in a given year, there was a penalty assessed equal to 50% of the total RMD, and then the RMD still needed to be taken. That penalty has now been dropped to 25%, and a correction window has also been established. The correction window allows for one to reduce the 25% penalty to 10%, as long as the mistake is rectified before the first of three dates: the date the Notice of Deficiency is mailed to the tax payer, when the tax is assessed by the IRS, or the last day of the second tax year after the tax is imposed.  A number of the details associated with the correction window are still being determined from the language of the law, so we realize it is a little confusing at this point.  The real takeaway from the correction window is that any mistakes associated with RMDs should be remedied as soon as possible to reduce any potential penalties.

Another change, though less common, is the elimination of RMDs from Roth 401(k),Roth 403(b), and Roth 457(b) plans beginning in 2024.  For Roth IRAs there have never been RMDs, and there was a fair amount of confusion as to why employer sponsored plans with Roth features did have RMDS, so this piece is more of a way to even out policy than anything else.

Catch Up Contributions

Employer sponsored plans and IRAs allow extra contributions above the annual deferral limit for those who are over the age of 50 known as catch up contributions.

For 2022, the catch up contribution for a Traditional IRA was $1000, which is also what it has been for the past 15 years.  Starting in 2024 it will be adjusted for inflation, and will increase in $100 annual increments as dictated by the prior year’s inflation.

For employer sponsored plans (401(k)s, 403(b)s, etc.), the catch up contribution for 2022 was $6500.  This catch up amount has already been progressively increased with inflation, but there are some changes that will take place as of 2025 for those who are aged 60, 61, 62, and 63.  Beginning in 2025, the catch up contribution for individuals between 60 and 64 participating in an employer sponsored plan will be the greater of $10,000, or 150% of the regular catch up contribution of the prior year.

Conversions

While there has been many discussions regarding the elimination of certain types o Roth IRA conversions, SECURE 2.0 doesn’t do away with any of the methods currently available for Roth conversions. On the contrary, it adds a new type of Roth conversion: the 529 to Roth transfer.

Currently, the dollars in a 529 plan must be used for qualified education expenses, or their distribution is taxed at the ordinary federal income tax rate, plus a 10% penalty—some states also assess a state income tax penalty.  Beginning in 2024 though, 529 dollars can be transferred to a Roth IRA in annual amounts equal to the annual deferral maximum, assuming certain criteria are met:

1. The Roth IRA receiving the funds is in the name of the beneficiary of the 529
   account
2. The 529 plan has been maintained for at least 15 years
3. Contributions from the 5 years prior to the transfer (and their earnings) cannot
   be transferred
4. Total transfers do not exceed $35,000 in a person’s lifetime
5. The owner of the Roth IRA has earned income in the year that the transfer
   occurs

Employer Sponsored Plans

There are a lot of changes laid out SECURE 2.0 for employer sponsored plans, so what’s below is what we believe to be some of the most important pieces of the new legislation.

As of enactment, SECURE 2.0 allows for employer matching, and profit sharing, to be allocated to Roth elements of an employer sponsored plan.  As a result, the new legislation also allows the creation of Roth SIMPLE, and Roth SEP plans.  While this does create some flexibility for an employer, any employer contributions allocated to the Roth portion of a plan will be counted as income for the employee.  This section of SECURE 2.0 also creates a policy that requires catch up contributions to be allocated to the Roth portion of employer sponsored plans for high wage earners.  This part will go into effect in 2024, and as of now, will be applicable to those who have wages in excess of $145,000—this amount will be adjusted for inflation going forward.

Beginning in 2024, employers will be able to amend their plans to allow for matching contributions to go towards employees student loan repayments.  The vesting and matching schedule must remain the same as normal salary deferrals.

Beginning in 2025, many new 401(k)s or 403(b)s will be required to have auto enrollment as part of their plan.  There are a lot of exemptions to this rule however.

As of this year (2023), employers with 50 or less employees will be able to claim a credit equivalent to 100% of the start-up costs of the plan.  Prior to this year, there was a maximum credit of 50%.  For such employers, there is also the ability to claim further credits towards employer contributions in the first 4 years of the plan.

Through the end of 2022, employees had to be eligible to participate in a plan if they had worked at least 1000 hours in the past year.  Beginning in 2024, this changes to include employees who have been employed for at least 3 years, and have worked at least 500 hours in each of those years. As of 2025 it becomes at least 2 years of employment, with at least 500 hours in each of those years.

Apart from the pieces described above, there are also myriad additions to the functionality of SEP and SIMPLE plans, as well as when hardship distributions can be obtained.

A lot of the language in the SECURE Act 2.0 is still being parsed, so there may be further large implications to everything that is laid out in this article.  While it does not seem as if there are any new restrictions imposed as a result of the new legislation, things are still subject to change. As with anything else, it’s important to consult your financial advisor and CPA to determine how any of these changes may affect you, and if there are opportunities to take advantage of. If you are currently in need of a financial advisor, or could use a second opinion, feel free to contact us at Moore Wealth.  We’re more than happy to provide a second set of eyes for your financial plan.