The much-anticipated and long-awaited retirement bill known as SECURE Act 2.0 has now become law as it was included in the Consolidated Appropriations Act of 2023 which President Biden signed into law on December 27, 2022.
Read on for the highlights of major changes.
One of the major headline changes, SECURE 2.0 pushes Required Minimum Distributions (RMD) to age 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later. In addition, the bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%. As a reminder, a RMD is the money you must remove from your traditional IRA in a particular year thus increasing your taxable income for that year.
In addition, SECURE 2.0 includes a significant number of Roth-related changes (both involving Roth IRAs as well as Roth accounts in employer retirement plans like 401(k)s), though notably, the legislation does not include any provisions that restrict or eliminate existing Roth strategies (e.g., backdoor Roth conversions). These changes include aligning the rules for employer-retirement-plan-based Roth accounts (e.g., Roth 401(k) and Roth 403(b) plans) with those for individual Roth IRAs by eliminating RMDs, creating a Roth-style version of SEP and SIMPLE IRA accounts, allowing employers to make matching contributions and non-elective contributions to the Roth side of the retirement plan instead of just the pre-tax portion (though participants will be subject to income tax on such contributions), and allowing for transfers from 529 plans to Roth IRAs (with significant restrictions).
SECURE 2.0 also includes several measures meant to encourage increased retirement savings. These include making IRA catch-up contributions subject to cost of living adjustments (COLAs) beginning in 2024 (so that they will increase with inflation from the current $1,000 limit), while also increasing 401(k) and similar plan catch-up contributions; creating a new “Starter 401(k)” plan (aimed at small businesses that do not currently offer retirement plans; such plans would include default auto-enrollment and contribution limits equal to the IRA contribution limits, among other features); and treating student loan payments as elective deferrals for employer matching purposes in workplace retirement accounts, which would allow student loan borrowers to benefit from an employer match even if they can't afford to contribute to their own retirement plan.
Ultimately, no single change in SECURE 2.0 requires urgent action before year-end. I’ll be attending a deep dive class this coming week on the many changes embedded in the bill and I’ll be communicating new financial planning and tax planning opportunities in future newsletters and in our regular meetings.