Perhaps the most noteworthy change in SECURE 2.0 is the raising of the required minimum distributions age from 72 to 73 for all taxpayers turning 72 after December 31, 2022
With much of the country distracted by the holidays and New Year’s resolutions, President Joe Biden signed the extensive $1.7 trillion Consolidated Appropriations Act, 2023, into law on December 29, 2022. In addition to funding the government for another year, this act packages together various new laws and provisions including important tax and retirement provisions within the SECURE 2.0 Act. This law builds on its predecessor, the SECURE Act of 2019, which was formally known as the Setting Every Community Up for Retirement Enhancement Act. SECURE 2.0, staying true to its name, contains a plethora of improvements to the U.S. retirement system primarily focusing on expanding plan coverage, increasing retirement savings, and simplifying and clarifying retirement plan rules. While some of the improvements contained in SECURE 2.0 will take effect immediately, others will take years to be implemented.
Required Minimum Distributions
Perhaps the most noteworthy change in SECURE 2.0 is the raising of the required minimum distributions (RMD) age from 72 to 73 for all taxpayers turning 72 after December 31, 2022. In addition, the act further raises the RMD age to 75 in 2033. At first, this might seem like great news because you are not required to take distributions at age 72, which means less taxable income and a lower tax liability in that year as well as continued tax deferral. Of course, by deferring withdrawals by even a year or two, you are allowing the principal to grow, which can create larger withdrawals (and larger tax liabilities) in later years as your life expectancy decreases and RMDs rise. Further, with these larger RMDs and increased income in later years, your Medicare premiums may also rise (despite the recent reductions) as these premiums are tied to your income.
It also follows suit that the longer you wait to withdraw from your retirement accounts, the less time there is to withdraw the remaining assets, resulting in a larger amount passing to your heirs. Because the original SECURE Act of 2019 requires heirs to withdraw all funds from the inherited IRA within 10 years, your heirs could indeed be facing a steeper tax bill in the future.
Automatic Enrollment in Employer Plans
Another significant component of the legislation is automatic enrollment in employer plans, making retirement plans more readily available to those not currently enrolled in one. Under the act, automatic enrollment would be required of new 401(k) and 403(b) plans that start after December 31, 2024. For existing 401(k) and 403(b) plans, automatic enrollment would remain optional.
While SECURE 2.0 requires certain employers to enroll eligible employees in their retirement plan automatically, employees would still have the choice to opt out at any time. With automatic enrollment, the employee’s initial compensation deferral rate would be at least 3 percent, but not more than 10 percent, depending on plan provisions. This deferral would be increased by 1 percent each year until the total becomes 10 percent, but the total is not to exceed 15 percent. Additionally, employees can opt out or change deferral percentages. There are some exemptions to this new provision, such as small businesses, government plans and church plans.
Other Changes to Retirement Savings
For those closing in on retirement, the amount of maximum catch-up contributions has been raised for certain taxpayers. Beginning in 2025, taxpayers between the ages of 60 and 63 can contribute the greater of $10,000 or 150 percent of the regular catch-up amount for people who are at least 50 years old. However, SECURE 2.0 also limits the types of catch-up contributions many taxpayers can make. Beginning in 2024, all catch-up contributions must be on a Roth basis (rather than pre-tax), unless the taxpayer is an employee earning less than $145,000 per year.
SECURE 2.0 also broadens the availability of retirement plans for part-time workers. Previously, part-time employees needed to work three consecutive years to be eligible for their company’s retirement plan. Beginning in 2025, this threshold will be reduced to two consecutive years with at least 500 hours worked in each year.
Another provision to encourage savings is a tax credit available to certain low-income taxpayers, which provides a credit of 50 percent of their contributions to their retirement plan. This 50 percent credit would allow up to $2,000 in contributions and will take effect in 2027.
Not only does SECURE 2.0 aim to improve the retirement process for those already saving, it also aims to improve it for those who are just starting. The act introduces student loan matching in 2024, which allows employers to match employee’s student loan payments with retirement plan contributions. Repayment of any loan used for higher education expenses is eligible for this matching. This provision will help alleviate the headaches of many recent graduates trying to balance their student loan repayments while saving for their future.
In addition to helping recent graduates manage their retirement and student loans, there is also a provision that could help parents who saved up for their children’s college expenses through a 529 plan. Beginning in 2024, beneficiaries of 529 savings plans with balances left over will be allowed to rollover up to $35,000 in their lifetime to a Roth IRA without incurring any penalties or tax. However, the rollover still must abide by Roth IRA annual contribution limits and the 529 savings account must have been open for more than 15 years.
Emergency Withdrawals from Retirement Plans
Sometimes you are presented with unexpected situations and need to pay emergency expenses with little to no notice. It can be difficult to rationalize withdrawing money early from retirement accounts to cover the expense, as they usually will incur hefty penalties. SECURE 2.0 included a provision allowing for one distribution of up to $1,000 per year from tax-preferred retirement accounts for emergency expenses. This distribution will not incur any penalties, but you cannot make another emergency distribution until the first distribution is paid back. In addition, the distribution must be paid back within three years. This will go into effect in 2024.
In addition, beginning in 2024, individuals that self-certify that they have experienced domestic abuse can withdraw the lesser of $10,000 or 50 percent of the account balance, without being subject to the 10 percent penalty on early withdrawals. The distribution will remain subject to tax, however. The participant may elect to repay the withdrawal over three years, but is not required to. If any withdrawals are repaid, the participant can receive a refund of the income tax paid on the amount of the withdrawal repaid.
For many taxpayers, the most consequential provision in SECURE 2.0 is the delaying of RMDs, followed by the changes to catch-up contributions and automatic enrollment for new plans. While some aspects of the act will not be implemented immediately, the RMD rule, among others, has already taken effect in the new year. It is best to not only be proactive about your tax planning, but to also consider your retirement planning and how these new provisions could potentially affect you and your beneficiaries now and in years to come. For example, perhaps the continuing deferral of RMDs and the increased tax burden on heirs makes now the right time to convert some pre-tax accounts to a Roth. If the assets in your traditional account continue to suffer from depressed values due to current recent conditions, now may be a particularly advantageous time to convert.
For More Information
If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, John I. Frederick, any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.