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Impact on individuals of the Secure 2.0 retirement plan changes
March 2023
In brief
On December 29, 2022, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act 2.0) was enacted as part of the Consolidated Appropriations Act. The legislation combines provisions from the Securing a Strong Retirement Act of 2022, the Enhancing American Retirement Now (EARN) Act, and the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE & SHINE) Act.
SECURE Act 2.0 makes numerous changes to retirement plans that are favorable to individuals. The provisions have various effective dates; however, many of the provisions of SECURE Act 2.0 that impact individual taxpayers go into effect starting in 2023.
Action item: Individuals should review the changes with respect to the starting age for required minimum distributions (RMDs) and also identify provisions that could allow increased contributions to retirement plans.
In detail
SECURE Act 2.0 makes the following changes to retirement provisions that impact individual taxpayers.
Required minimum distribution
- The starting age for RMDs from traditional IRAs, 403(b) plans, and qualified plans increased from 72 to 73 beginning in 2023. In 2033, the starting age for RMDs will increase from 73 to 75.
- Roth accounts under 401(k), 403(b), and 457 plans no longer will be subject to the RMD rules.
- The excise tax penalty for failing to take an RMD from an IRA has been reduced from 50% to 25%. If the failure to take an RMD is corrected within the specified time frame, the penalty decreases from 25% to 10%.
Observation: This change puts Roth accounts on par with Roth IRAs with respect to RMDs. Prior to enactment of SECURE Act 2.0, employees had to transfer their Roth accounts from employer-sponsored plans to a Roth IRA to avoid needing to take RMDs.
Catch-up limits
- Higher retirement plan catch-up limits will apply starting in 2025 for individuals aged 60-63. Currently, individuals over the age of 50 can contribute an additional $7,500 to employer-sponsored plans. Starting in 2025, that amount will increase to the greater of $10,000 or 50% more than the regular catch-up amount for those individual employees aged 60-63.
- The IRA catch-up contribution amount for individuals over the age of 50 will increase for cost-of-living adjustments beginning in 2024, up from the current amount of $1,000.
- Under current law, catch-up contributions to qualified retirement plans can be made on either a pre-tax or after-tax (e.g., Roth) basis. For tax years beginning in 2024, all catch-up contributions to qualified retirement plans are subject to Roth tax treatment, unless the plan participant earns $145,000 or less.
Observation: Even with the increased contribution amount, the IRA deduction remains subject to the AGI phase-out ($73,000-$83,000 for single filers and $116,000-$136,000 for joint filers in 2023).
Observation: The shift allowing all catch-up contributions to qualified retirement plans to be subject to Roth tax treatment is intended to prevent affected individuals from receiving a current tax benefit for catch-up contributions; however, it will result in tax-free withdrawals during retirement.
Qualified charitable deductions
- Individuals who put their RMDs toward qualified charitable deductions (QCDs) currently are limited to $100,000. This amount will be indexed annually for inflation, effective starting in 2023. Additionally, individuals can use up to $50,000 of their QCDs as a one-time distribution to a charitable gift annuity or charitable remainder trust; if this is done, only the IRA owner and his/her spouse can receive payments, which will be taxed at ordinary rates. Contributions cannot be made to an existing charitable remainder trust, and no additional contributions can be made to the trust in the future.
Observation: If a taxpayer uses $35,000 of their QCD to distribute to a charitable gift annuity in one tax year they can not in a following year make a second distribution of $15,000, since the $50,000 amount is for a one-time annuity transfer.
Unused 529 plan funds
- Beginning in 2024, owners of certain 529 plans can transfer unused funds from the 529 account to a Roth IRA for the same named beneficiary. This option is only allowed for 529 plan accounts that have existed for at least 15 years, and the amount transferred cannot be more than the total contributions made to the 529 plan during the most recent five years before the transfer. The amount that can be transferred annually is limited to the annual amount allowed as a Roth IRA contribution, with all transfers limited to a maximum of $35,000.
Observation: This allows funds no longer needed for educational expenses to grow via a tax-exempt vehicle; however, such transfers will be limited to the same rules and phase-outs as Roth IRA contributions.
Qualified student loan payments
- Beginning in 2024, employers can make matching contributions under 401(k), 403(b), or SIMPLE IRA plans with respect to “qualified student loan payments” (indebtedness incurred to pay higher education expenses). This will allow individual employees to receive matching contributions from their employers by repaying their student loans, even if they are not making retirement plan contributions themselves.
Observation: This provision is intended to benefit employees who are unable to save for retirement due to outstanding student debt.
Early withdrawals
- Beginning in 2024, there will be an exception to the 10% excise tax on early distributions from 401(k) plans and IRAs for emergency expenses. SECURE Act 2.0 defines emergency expenses as “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Under this exception, only one distribution per year of no more than $1,000 is allowed, and individuals have the option to repay the distribution within three years. If repayment does not occur, no additional emergency distributions are allowed within the three-year repayment period.
- Beginning in 2024, an exception to the early withdrawal penalty will be available for certain distributions taken by victims of domestic abuse. Domestic abuse survivors can withdraw the lesser of $10,000 or 50% of the account without penalty.
- An exception to the early withdrawal penalty is available for certain distributions taken by individuals with a terminal illness. Terminally ill means an individual who has been certified by a physician as having an illness of physical condition that can reasonably be expected to result in death in 84 months or less.
- Under certain circumstances, employees are permitted to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal.
Plan administrator database
- SECURE Act 2.0 calls for creation of a national online database for Americans’ retirement plans at the Department of Labor. The searchable database will allow individual employees to search for the contact information of their plan administrator and find/retrieve benefits earned at different jobs prior to retirement. This database should be created within the next two years.
Contributions
- Starting on the date of enactment, sponsors of defined contribution plans can provide participants with the option of receiving matching contributions on a Roth basis, rather than on a pre-tax basis.
- Beginning in 2023, SIMPLE IRAs can accept Roth contributions from employees. In addition, employers can offer employees the ability to treat employee and employer SEP contributions as Roth contributions.
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