In the final week of 2022, Congress passed a large omnibus spending package which included a multitude of changes affecting tax and retirement planning. Dubbed “SECURE Act 2.0,” the new bill revises and updates many of the items in the original SECURE Act of 2019, but also introduces several new measures that will impact employers, workers, and retirees.
In fact, the scope of SECURE Act 2.0 is so broad that it will affect nearly everyone journeying along the path—from young workers just starting their first job to pre-retirees and retired persons. There is far more in the Act than can be covered in a single blog post, but some of the key changes are highlighted below. In order to help you focus on those items that may be most relevant to you, the changes are categorized according to the stages of life when they are most applicable:
Young Workers and Parents of College-Bound Children
Typically, before age 59 ½, there is a 10% penalty for early withdrawals from retirement plans like 401(k)s and IRAs. There are a few “emergency” exceptions to that rule, however, and SECURE Act 2.0 has expanded the definition of an emergency to include almost any personal or family financial hardship. The emergency withdrawal amount is limited to only $1,000, however. The amount must be fully paid back before a second withdrawal is requested, and only one withdrawal every three years is allowed.
The 10% penalty will also be waived for individuals diagnosed with a terminal illness and for victims of domestic abuse. Withdrawals for natural disasters also become easier to request under the new Act and are limited to $22,000 per occurrence.
Effective in 2024, the Act allows for the creation of “Emergency Savings Accounts,” which will be linked to existing employer-based 401(k) or 403(b) plans. The employee can fund these new accounts through paycheck deferral (up to $2,500), and employers can match contributions to these ESA plans as well. (Only those employees who are considered “not highly compensated” will be eligible for new ESA accounts.) The kinds of investments allowed in ESAs will be limited to low-risk, cash-like assets. Presumably, these new ESA accounts are intended to act as a buffer against early retirement account withdrawals.
Also beginning in 2024, when employees make payments toward their student loan debt, employers will be allowed to make matching contributions to the employee’s retirement plan. In other words, student loan payments will effectively be treated as employee contributions to their own retirement plans, allowing employers to match those contributions as if they were made to a 401(k) or a 403(b) account.
And finally, the Act also introduces the ability (in 2024) to make college 529 plan transfers to a Roth account owned by the same beneficiary. This creates yet another option for unused 529 education plan funds but is subject to several limits. Annual contributions from a 529 to a Roth will be limited to the prevailing IRA/Roth annual contribution limits each year, and the lifetime transfer amount is limited to $35,000. The 529 account must have existed for at least 15 years before transfers are allowed, and the last 5 years of 529 contributions will not be eligible for a Roth transfer.
Older Workers / Pre-Retirees
Current law allows for “catch-up” contributions to employer-sponsored retirement plans for employees aged 50 or older. In 2022, for example, employees who met the age requirement were allowed to contribute an extra $6,500 to their 401(k)s, 403(b)s, and 457 plans, in addition to the standard elective deferral limit of $20,500. SECURE Act 2.0 enhances this ability for older workers, but only for those specifically aged 60, 61, 62, or 63.
Beginning in 2025, workers in that narrow age bracket (60-63) will be able to contribute an extra $10,000 or 150% of the prevailing catch-up amount (whichever is greater) in 2025 to their employer-sponsored retirement plan. SIMPLE plan participants will also enjoy enhanced catch-up contributions in that age bracket to the greater of $5,000 or 150% of the prevailing standard amount in 2025.
Starting next year (2024), higher earners will be required to make any catch-up contributions to a Designated Roth Account (DRA), which is a segregated post-tax account within an employer-sponsored retirement plan. If an employee over 50 earns more than $145,000 in wages from the employer that sponsors the plan, catch-up contributions will be considered “post-tax” and separated from pre-tax funds.
And finally, for those employees with Designated Roth Accounts, Required Minimum Distributions (RMDs) will no longer be required from these employer-sponsored post-tax accounts, as they had been when the account owner reached age 72. Since non-employer sponsored Roth IRA accounts are already not subject to RMDs, the rules regarding distributions from DRAs and Roth IRAs will equalize.
The “original” SECURE Act of 2019 raised the age at which RMDs from IRA accounts must begin from 70 ½ to 72. This Act will push back RMD starting ages even further to age 73 for anyone who turns 73 between 1/1/2024 and 12/31/2032. (If you turn 72 in 2023 you can delay your RMDs by another year and begin them in 2024). After 12/31/2032, RMDs will begin at age 75 for those who have not turned 73 yet.
The age at which you become eligible to make Qualified Charitable Distributions (QCDs) from an IRA account did not change – it remains 70 ½.
SECURE Act 2.0 has also added another new option for individuals who inherited an IRA from their spouse. Before this act was passed, spousal beneficiaries of inherited IRA accounts could generally decide whether to roll the inherited IRA account into their own IRA, or to designate their deceased spouse’s IRA as an Inherited IRA account, delaying RMDs until their spouse would have turned 72. The new Act now allows surviving spouses to simply be treated as the deceased spouse. This option may be particularly beneficial when inheriting an IRA from a younger spouse.
While many of the changes in SECURE Act 2.0 will no doubt benefit workers, savers and retirees, the Act has added a new layer of complexity to an already complex subject. We recommend that you speak to a trusted advisor or tax professional for clarification on how this law may impact your personal situation.