Congress passed the SECURE Act 2.0 late in December of 2022. The Act built upon the foundation laid by the 2019 SECURE Act which was also passed in December of that year. The 2022 act has over 90 changes to how retirement plans work and are administered in the US. Among the more prominent changes include increasing the age at which retirees must begin taking RMDs from IRA and 401(k) accounts, and changes to the size of catch-up contributions for older workers with workplace plans. Additional changes include: helping younger workers continue saving while paying off student debt, making it easier to move accounts from employer to employer, and enabling workers to save for emergencies within retirement accounts.
The RMD age has now changed to 73 for people who attain age 72 after 12/31/2022. The RMD age will then increase to age 75 beginning in 2033. At first blush, this seems a boon to retirees as they can let their qualified retirement accounts grow. However, not all retirees, in our view, will benefit from deferring distributions and the associated taxes to a later age. Delaying distributions for many retirees could result in larger distributions, and higher overall taxes, including a sudden jump at RMD age into a higher tax bracket. The other major change as it relates to RMDs is the reduction in the penalty for RMDs not taken in a timely manner. The penalty is now 25% of the late RMD versus 50% penalty prior to 2.0.
Another significant change, and a big win for education and retirement saving, is the change to 529 plans that have excess assets. It has been a common refrain from clients that they are afraid they might overfund a child’s 529 and then pay a penalty to withdraw those excess funds. With 2.0, any excess funds left over after college can be rolled into a Roth IRA for the benefit of the child. This now alleviates the risk of overfunding AND gets the child a head start on their own retirement savings. There are a few rules regarding the rollover: (1) The 529 must be at least 15 years old prior to the rollover, (2) there is a $35,000 lifetime cap & (3) you can only rollover the annual IRA contribution limit ($6,500 in 2023 for those under 50).
Speaking of folks over 50, the catch-up provisions were also updated. The 401(k) catch-up provision for employees age 50 and over is now $7,500 for 2023 ($3,500 for SIMPLE plans) and adjusted for inflation annually. Beginning in 2025, employees age 60–63 will have a higher catch-up limit — 50% more than the regular catch-up limit or $10,000 more, whichever is greater. There is a caveat to this increase. If the employee makes more than $145,000 per year the catch-up dollars must all be made to a Roth account using after-tax dollars. For IRA’s the catch-up is $1,000 but is now indexed for inflation each year, allowing for larger year-over-year catch-up amounts.
Another significant change that is aimed at helping out younger workers who are just starting out is the Student Loan Repayment option. Employers will be permitted to make matching contributions to their company sponsored retirement plan, or SIMPLE IRA with respect to “qualified student loan payments”. Most workers coming out of college carrying student debt often forego retirement plan contributions in order to continue to pay off college loans. With 2.0 employers are now allowed to make contributions on behalf of employees, regardless of whether those employees do or do not make retirement plan contributions. The employer may match the amounts of student loan debt repaid by the individual worker in a given year to the company’s sponsored retirement plan.
There are many other changes and updates, ranging from hardship withdrawals and emergency savings to Qualified Longevity Annuity contracts (QLACs) and charitable gifting. Sierra Pacific Financial Advisors is hosting a complimentary webinar on this topic on Thursday, April 6th at 12:00 pm Pacific Time. We invite you to join us and learn more about SECURE Act 2.0. You may register here: SPFA – SECURE Act 2.0 – Retirement and Tax Strategies.