The SECURE 2.0 Act is now law. This new Act, passed to strengthen Americans retirement savings options, builds on the SECURE Act of 2019 (“Setting Every Community Up for Retirement Enhancement”). The goal of both Acts is to make sure that Americans have adequate retirement funds.[1]

There are two basic parts to the SECURE 2.0. Part 1 is intended to benefit retirees and those close to retirement age. Part 2 is intended to help younger workers save for retirement. The following is a summary of the main points from SECURE 2.0 and we have also included some information for 2022 retirement contributions which are due April 15, 2023.

Part 1 – For our clients in or near retirement.

1. Important changes to Required Minimum Distributions (RMDs).

  • As of January 1, 2023, retirement account owners must start taking RMDs at age 73. The previous age to begin taking RMDs was 72, so individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings (“RMD”) from their retirement accounts.
    Two important things to think about:

    If you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled.

    If you are turning 72 in 2023 and have already scheduled your withdrawal, you may want to update your withdrawal plan and consider when to take your first RMD; either by December 31, 2024, or delay until no later than April 1, 2025. Remember, if you delay your first RMD to April 1, 2025, you will need to take two RMDs in 1 tax year; your first by April 1, 2025, which satisfies your required withdrawal for 2024, and your second by December 31, 2025, which satisfies your required withdrawal for 2025.

  • Starting in 2023, the steep penalty for failing to take an RMD will decrease to 25% of the RMD amount not taken (50% currently.)  The penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
  • Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024.

2. Higher retirement plan catch-up contributions.

Tax year 2022. Retirement plan contributions for 2022 are due on or before April 15, 2023. As long as you have sufficient taxable compensation[1], you can contribute up to $6,000 to a traditional IRA or Roth IRA (or a total of $6,000 to multiple IRAs).  Caveat: be sure to mark your contributions for “2022”; otherwise they may be deposited with a 2023 designation.

If you were at least 50 years old in 2022, you can save an extra $1,000 in an IRA (the “catch up”), for a total IRA contribution of $7,000 for the year.

Tax year 2023. What happens in 2023? Retirement plan contributions increase to $6,500 for tax year 2023 but the catch up amount stays at $1000 for those over age 50.

Starting in 2024. The catch up limit will be indexed to inflation, meaning it could increase every year, based on federally determined cost-of-living increases.

Starting in 2025. SECURE 2.0 increases the catch-up limit starting January 1, 2025 by allowing individuals ages 60 through 63 years old to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. (The catch-up amount for people age 50 and older in 2023 is currently $7,500.) However, if you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.

3. Matching for Roth accounts. Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts (although it may take time for plan providers to offer this and for payroll systems to be updated). Previously, matching in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, after which earnings can grow tax-free. Additionally, unlike Roth IRAs, RMDs from an employer-sponsored plan are required for Roth accounts until tax year 2024.

4. Qualified charitable distributions (QCDs). Beginning in 2023, people who are age 70½ and older may elect as part of their QCD limit a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. This is an expansion of the type of charities that can receive a QCD. This amount counts toward the annual RMD, if applicable. Note, for gifts to count, they must come directly from your IRA by the end of the calendar year. QCDs cannot be made to donor advised funds.

5. Other changes for annuities. Qualified longevity annuity contracts (QLACs) are getting a boost. QLACs are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that begin payments on or before age 85. The dollar limitation for premiums increases to $200,000 from $145,000 starting January 1, 2023. The law also eliminates a previous requirement that limited premiums to 25% of an individual’s retirement account balance.

Part 2 – For clients further away from retirement.

6. Automatic enrollment and automatic plan portability. The Act requires businesses adopting 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 accounts to a new plan when they change jobs. The change could be especially useful for lower-balance savers who typically cash out their retirement plans when they leave jobs, rather than continue saving in another eligible retirement plan.

7. Emergency savings. Defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first four withdrawals in a year would be tax- and penalty-free. Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses.

8. Student loan debt. Starting in 2024, employers will be able to “match” employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.

9. What happens in 2033? While ten years off, SECURE 2.0 extends the age at which RMDs must start to 75 starting in 2033.

The SECURE 2.0 Act provides increased opportunities for retirement savings and planning. Please contact us with your specific questions about the SECURE Acts or with any other retirement questions you may have.

[1] Non-citizens can also participate in a company 401(k) plan and a traditional or Roth IRA.  If, as a non-citizen, you are working in the United States for a U.S.-based company, your employer may offer a 401(k) retirement plan. If, as a non-U.S. citizen, your employer doesn’t offer this type of plan, you have the option of contributing to an IRA.

[2] Generally, if you are not earning any taxable income, you cannot contribute to either a traditional or a Roth IRA. However, in some cases, married couples filing jointly may be able to make IRA contributions for the non-earning spouse based on the taxable compensation reported on their joint return.