The Secure Act 2.0

The Secure Act 2.0

US Capitol building in Washington DC

The SECURE Act 2.0 is here. It’s part of the 4,000+ page New Year’s gift to us all that was signed into law on December 29, 2022 by President Biden, also known as the Consolidated Appropriations Act of 2023.

SECURE stands for Setting Every Community Up for Retirement Enhancement and this bill is all about retirement planning. You may recall the SECURE Act passed into law almost exactly three years ago in December 2019 and it included the “death of the stretch” provisions for Inherited IRAs. While there isn’t a headliner provision quite as large in this bill, there are over 100 changes! Here are a few we think will be most impactful to Clients:

  • Starting Age for Required Minimum Distributions (RMDs) delayed again – this time to 73, then 75 in 2033
    • If you turn 72 in 2023, you get an extra birthday present from Congress – No RMDs until you turn 73. One of the biggest changes in the SECURE Act 2.0 is delaying the RMD beginning age again (it was recently delayed from 70.5 to 72).
    • For anyone born in 1950 or earlier, there is no change as you turned 72 before 2023 (or 70.5 before 2020) and are already taking RMDs.
    • For anyone born 1951-1959, RMDs will begin the year you turn 73.
    • For anyone born 1960 or later, RMDs will begin the year you turn 75.
    • This means a few things:
      • There will be no first-time RMDs in 2023 or 2033. So, if you are turning 72 this year and were planning to take your first RMD, no need. You can wait until next year (we’ll reach out at that point to initiate the first distribution from your Schwab retirement account(s) and manage the process for you each year).
      • It also means there is more time for strategic planning around IRAs, whether that’s doing Roth Conversions or strategic IRA distributions for spending needs to take advantage of lower tax brackets before RMDs kick in. We review these possibilities for all clients every year and will reach out if we think there’s an opportunity (and don’t hesitate to reach out if you think it might be an appealing year for you – the sooner we start the conversation, the better).
      • The start age for Qualified Charitable Distributions (QCDs) from IRAs is still 70.5, so those can be strategic tax-free distributions from your IRA prior to RMDs, too, if they make sense for you.
  • Increased Catch-Up contributions to retirement accounts
    • Beginning in 2024, the IRA catch-up contribution limit will be indexed for inflation.
    • Beginning in 2025, individuals turning ages 60-63 during the year will qualify for a 401(k) (and other similar plan) catch-up contribution equal to the greater of an additional $10,000 or 150% of the catch-up contribution. For example, the current 401(k) catch-up contribution for 2023 is $7,500 so a total catch-up contribution of $11,250 could be made.
  • No RMDs for Employer Roth Accounts
    • Previously, certain employer Roth accounts (like a Roth 401(k)) required RMDs like traditional accounts. This was unattractive because it forced you to take tax-free money out instead of leaving it in to let it grow. It could be avoided by rolling the Roth account into a Roth IRA (as Roth IRAs have no RMDs), but now these accounts won’t require RMDs.
  • Roth, Roth, Roth!
    • There will be the option to open a Roth SIMPLE or a Roth SEP IRA so employers/employees with these retirement plan options will have the option to make Roth contributions.
    • Employers will be allowed to make matching contributions to employee retirement accounts in the Roth portion of their account. These amounts will be included as gross income (as Roth contributions must be made with after-tax dollars).
    • For employees with high income over $145,000, catch-up contributions after age 50 will be required to be made to the Roth portion of the retirement account.
    • Starting in 2024, there will be the ability to make 529-to-Roth IRA transfers if a 529 has been open for 15 years up to a lifetime maximum of $35,000 (and subject to more specifications we won’t currently list here).
  • Spouses Inheriting IRAs Have More Options
    • Spouses inheriting IRAs can now elect to be treated as the decedent for RMD purposes (and delay taking RMDs until the deceased spouse would have reached their RMD start date).
  • Automatic 401(k) enrollment and escalation
    • Beginning in 2025, new employer plans will require auto-enrollment at an initial rate of at least 3% (up to 10%) and it must automatically escalate by 1% per year until it reaches 10%.
    • This is a fantastic change. As studies have shown, an opt-out approach works better for participation than an opt-in approach. And saving for retirement is such an important thing to do as soon as possible, so this new approach will be great for the population and their future savings goals!
  • Lower penalties for missed RMDs
    • Previously, if you missed an RMD from an account, you had to take the RMD and pay a 50% penalty in taxes. Now, the penalty has been reduced to 25% and is further reduced to 10% if the missed RMD is corrected within the correction window (TBD what that window is).

There are so many more changes than this but many of them are narrowly applicable to certain people and they start at different times (between now and 2025). We will continue to review and if we believe a change will impact you significantly, we’ll talk about it. Let us know any questions you have based on what you’ve read above or elsewhere – we’re here to think it through with you.