When the SECURE Act 2.0 was signed into law on December 29, 2022, it substantially modified the original SECURE Act of 2019.1 This legislation aims to improve address several common retirement challenges in the United States, at least as they relate to retirement plans. As with all things governmental, it’s complicated.
We’ll look at a handful of important changes (but not all) that have already taken effect, focusing on 2023. Then we’ll look ahead to what aspects of the plan won’t kick in until the beginning of next year.2
RMD Age Change
The Required Minimum Distribution (RMD) was created to shift more retirement savings into being spent sooner than later. In other words, it pushes you toward spending more during your lifetime instead of saving it pass into your estate.
The SECURE Act of 2019 increased the required minimum distribution age to 72, and then the new minimum distribution age was raised to 73 on January 1 of this year. The change appears to have been made to help people save longer for retirement and give retirees more options for managing their retirement funds.3
Reduced Penalties for Late RMDs
The SECURE Act 2.0 reduces the punishment for failure to take required minimum distributions. And this reduction is substantial, reducing the penalty from 50 percent to 25 percent of the required RMD amount. In fact, if a failure to take a required minimum distribution from an IRA is corrected in a timely manner, the penalty—technically an excise tax—will be further reduced from 25 percent to 10 percent. This reduction in penalties is already in effect for the current tax year.
Beyond these penalty reductions, there is also now a statute of limitations for missed RMDs. For example, the IRS cannot impose a penalty more than three years after the payment was supposed to be made.
SIMPLE and SEP Roth IRAs
SIMPLE IRAs can now accept Roth contributions under SECURE Act 2.0. Also, with limited exceptions, simplified employee pension plans (“SEPs”) could only accept employer money, not Roth contributions. It will now be possible for employers to offer employees the option of treating their SEP contributions as Roth IRAs, in whole or in part. These provisions already went into effect in January.
Employer Match in Roth IRAs
Regarding employer matching, the new rules, already in place, now allow participants to choose to receive matching contributions on a Roth basis.
A SECURE Acronym
Here’s a quick side note that I couldn’t resist. Acronyms make complex concepts—and legislation—seem a bit easier to recall. The SECURE Act of 2019 (and SECURE Act 2.0) is no exception, and it’s also a good example of starting with the word (secure), and then coming up with the words the letters stand for. There’s simply no way that “Setting Every Community Up for Retirement Enhancement” came first!
Feeling Charitable?
People who enjoy maximizing their charitable giving will benefit from the one-time charitable distribution option and the increased qualified charitable distribution limit. The SECURE Act 2.0 also expands the provision on IRA charitable distributions. A one-time $50,000 distribution can be made to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuities. In addition, the $100,000 annual IRA charitable distribution limit is now indexed for inflation. Be sure to consult with your financial advisor regarding the effective use of trusts.
But Wait, There’s More
The SECURE Act 2.0 is, in many ways, just getting started. While there’s plenty to keep track of for this year alone, here’s a sneak peak at the changes that will go into effect in 2024 4 :
• Inflation-indexed $1,000 catch-up contribution for IRAs and 401(k)s for individuals aged 50 and above
• Indexed inflation for qualified charitable distributions
• Rollover of up to $35,000 from 529 education-savings accounts to a Roth IRA in the name of the 529 beneficiary
• Removal of required minimum distributions (RMDs) for Roth 401(k) contributions during the owner’s lifetime, aligning them with Roth IRAs
• Employer matching contributions allowed on student-loan payments
• Exceptions to the 10% early distribution penalty for financial emergencies (up to $1,000/year) and payments for victims of domestic abuse (up to inflation-indexed $10,000)
The Takeaway
The SECURE Act 2.0 brings impactful changes to retirement planning,5 like adjusting the age for minimum distributions and reducing penalties for late withdrawals. It also introduces new provisions for Roth IRAs and even makes changes to charitable giving. However, understanding these new laws and applying them to your specific retirement planning scenario can be complex. The personalized advice you can get from your financial advisor can help you focus on how these changes actually affect you—and what to do next.
Sources
1 https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
2 https://www.wsj.com/articles/retirement-savings-changes-2023-1b2e99f0
3 https://www.icpas.org/information/copy-desk/insight/article/digital-exclusive-2023/6-secure-act-2.0-changes-to-know-in-2023
4 https://www.planningretirements.com/resources/infographics/secure-act-2-timeline/
5 https://www.forbes.com/advisor/retirement/secure-act-2/
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