SECURE 2.0 Act
On December 23, 2022, Congress passed legislation enhancing the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The 2022 version, referred to as SECURE Act 2.0, was signed by President Biden days later. The plan includes several important provisions that affect the way Americans plan and save for retirement.
We’ve highlighted some of the more important aspects of the Act below.
Required Minimum Distributions
One of the changes introduced through the SECURE 2.0 Act is an increase of the age at which Americans must begin taking Required Minimum Distributions (or “RMDs”) from their retirement accounts. Until last year, 72 was the age at which RMDs began, but the Act has increased that to 73 beginning in 2023.
Note that if you turned 72 in 2022 or earlier, you’ll still need to continue taking your RMDs as originally scheduled. If you’re turning 72 this year – 2023 – and you’ve already scheduled your RMD withdrawal, you may want to consider revisiting that plan.
Also, SECURE 2.0 also extends the age at which RMDs must start to 75 starting in 2033.
Retirement Account Catch Up Contributions
The limit for catch up contributions to employer-sponsored retirement plans for those 50 and older increases from $6,500 per year to $7,500 per year, effective in 2023.
In 2025, those between the ages of 60 and 63 will be able to save $10,000 more above the standard contribution limit. This amount will be indexed to inflation in subsequent years.
All catch-up contributions must be made on an after-tax basis (i.e. Roth account), except for those earning less than $145,000.
Beginning in 2024 the catch-up contributions to IRAs for those 50 and older (currently $1,000) will be adjusted for inflation in increments of $100.
529 Plan Rollovers
Under prior law, unused balances in 529 education savings plan could be taken as non-qualified distributions, but the earnings were subject to income tax and a 10% penalty.
Beginning in 2024 the beneficiary can roll up to $35,000 of unused funds into a Roth IRA.
The account must have existed for at least 15 years and the funds must transfer directly into a Roth IRA for the same individual who was the beneficiary. Contributions made in the previous 5 years, and any earnings attributable to those contributions, are not eligible for rollover. Also, the amount rolled must be within the annual (Roth) IRA contribution limits.
Penalty-Free Withdrawals for Long Term Care
The tax code imposes a 10% penalty on distributions taken from a retirement account prior to age 59 ½. There are several exceptions to this rule. Effective in 2026, the SECURE Act 2.0 adds another exception which allows withdrawals up to $2,500 to pay premiums on certain types of long-term care insurance.
Qualified Charitable Distributions (QCDs)
Currently individuals age 70 ½ and older can contribute up to $100,000 per year of their retirement account distributions to charitable (501(c)(3)) organizations. Effective in 2024, the limit will increase based on inflation.
Retirement Plan Auto-Enrollment
SECURE 2.0 requires businesses that set up new 401(k) and 403(b) plans to automatically enroll eligible employees, starting at a contribution rate of at least 3%, starting in 2025. It also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee’s low balance retirement account to their new plan when they change jobs.