Secure Act 2.0: A Refresher on Retirement Rule Changes

Following 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act, its successor, Secure Act 2.0, squeaked through Congress in late December. These measures went, in many cases, little noticed, as few seem to consume retirement planning articles between Christmas and New Year’s. Here are some helpful updates to be aware of if you are saving for, nearing or in retirement.

Less Ornery RMDs

First, and importantly for retirees, the required minimum distribution (RMD) age was bumped from 72 to 73 in 2023. Because traditional retirement accounts like 401(k)s and IRAs are funded with pretax income and don’t tax capital gain and loss, IRS rules require you to withdraw a certain amount every year, which is taxable as income. This amount, the RMD, ensures the IRS gets its pound of flesh.

Those turning 73 this year will need to take their first annual RMD by April 1, 2024—and each successive one by yearend thereafter. Also new this year, perhaps a bit of relief: If by chance you miss one of those pesky RMDs, the penalty is much less severe—and correctable. Rather than 50% of the RMD amount not taken, it is now 25%—and 10% if you rectify it within two years. Moreover, there is a three-year statute of limitations for the IRS to assess any penalty, versus none before. Note too, the IRS can waive a penalty altogether if you give reasonable cause for the delay (using Form 5329). But in our view, better to avoid the need altogether and just take it before it is due.

Meanwhile, for those approaching RMD age, Secure Act 2.0 further raises it to 75 in 2033. There is a dual benefit to these incremental increases. With lifespans rising on average, the later date allows retirement funds to grow tax-free for longer—thereby reducing longevity risk and improving long-term financial flexibility and security in the process.

Roth Accounts’ New Advantages

Secure Act 2.0 also makes Roth (after-tax) 401(k) and IRA contributions more user-friendly. Employees can designate their employers’ matching contributions be made as a Roth (with employees paying income tax on the amount). Before, Roth 401(k) matches were (confusingly) pretax only, housed separately from the Roth plan. Roth 401(k)s were also subject to RMDs, unlike Roth IRAs. This never made sense, and Secure Act 2.0 fixes the error, eliminating Roth 401(k) RMD requirements next year.

Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs for small businesses—fewer than 100 employees—now have Roth options, too. SEP plans are employer-contributed only, while SIMPLE plans receive both employer and employee contributions.

Broadening 401(k)s’ Reach

Besides more attractive options, the new retirement legislation encourages businesses that lack plans to start them via tax incentives and new Starter 401(k) plans. Qualified companies starting a plan can now get tax credits offsetting up to 100% of plan costs for three years. Helping make this easier, low-cost Starter 401(k)s available next year will offer eligible employees automatic enrollment with an annual contribution limit of $6000.

But Wait, There’s More!

Other new benefits worth a look:

• The 10% early withdrawal penalty from retirement accounts before age 59½ has more exceptions for unforeseen emergency expenses arising from terminal illness, domestic abuse and natural disaster.
• While it doesn’t start until 2025, higher 401(k) catch-up contributions will let workers age 60 to 63 sock away the greater of $10,000 or 150% of the standard, inflation-indexed catch-up limit for those 50+ years old, currently $7500 (on top of the $22,500 allowed this year). Also for participants earning over $145,000 annually, keep in mind catch-up contributions must be made into Roth accounts next year.
• Employers will be able to “match” qualified employees’ student loan payments beginning in 2024. Employees unable to make 401(k), 403(b), governmental 457(b) or SIMPLE IRA contributions because of student loans can now get employer-matching retirement plan contributions on the amount of their payments, using the same parameters the employer matches the employee’s retirement contributions on. We would suggest keeping good records of payments to support the match, but the law itself doesn’t state this is necessary. These matches may be especially timely with the COVID-era federal student loan payment moratorium set to end soon.
• Also beginning next year, beneficiaries can roll over their unused 529 college-savings plan funds—if held for 15 years with no contributions over the last 5 years—into Roth IRAs. The amount is subject to annual Roth IRA contribution caps and cannot exceed an aggregate $35,000 lifetime limit. The IRA owner must also have earned income of the rollover amount.

These are Secure Act 2.0’s main provisions in effect currently or on the near horizon. But that isn’t all. Retirement planning rule changes may make your eyes glaze over, but keeping abreast of them can save you some dough—and headache—down the road.