The New SECURE Act 2.0 and What it Means

President Biden signed the Consolidated Appropriations Act, 2023, a $1.7 trillion omnibus federal spending bill for fiscal year 2023, on December 29, 2022. Included in the bill is the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0. The SECURE Act 2.0 promises to increase tax-efficient retirement savings and charitable donations for individuals. Here are some of the highlights:

Increased Age for Required Minimum Distributions (RMDs)

The age at which you must start withdrawing retirement assets (and paying taxes on those assets) is raised from 72 to 73, as of Jan. 1, 2023, and to age 75 10 years later, on Jan. 1, 2033. Potentially, this could allow for more tax-free growth and the potential to delay RMDs for when the recipient may be in a lower tax bracket.

Increased Catch-Up Contributions

• For individuals 50 or older, additional contributions to retirement plans are allowed. Secure 2.0 increases the amount of “catch-up” contributions, depending on the type of plan;
• For 401(k) and other employer-sponsored plans, participants 50 or older can make an additional “catch-up” contribution of $7,500 in 2023, that amount increases with inflation after 2023;
•  Participants ages 60 through 63, can make catch-up contributions equal to the greater amount of $10,000 or 150% of the regular catch-up limit beginning in 2025; additionally, that $10,000 amount also will be indexed for inflation;
• Starting in 2024, catch-up contributions for participants with compensation of more than $145,000 (indexed for inflation) from the plan sponsor in the prior year must be made to a Roth account—in other words, contributed on an after-tax basis; and
• For Traditional and Roth IRAs, individuals over 50 can contribute to traditional or Roth IRAs up to $1,000 currently. That $1,000 amount will be indexed for inflation on an annual basis in 2024.

Increased Qualified Charitable Distributions (QCDs)

Related: SECURE 2.0 Ushers in a New Era for Retirement Savings

Currently, an individual who is 70½ or older can contribute up to $100,000 directly from an IRA to a qualified charity without recognizing any income on the donated amount, which also can count toward the individual’s RMD. Going forward, that $100,000 amount will now be indexed for inflation. For individuals who are 70½ or older, a new provision—part of the Legacy IRA Act—would permit a one-time QCD of up to $50,000 from an IRA to a charitable gift annuity (CGA), charitable remainder unitrust (CRUT) or charitable remainder annuity trust (CRAT) that benefits the participant or their spouse. Like an annual QCD, the $50,000 one-time QCD can also count toward the individual’s RMD. The new $50,000 one-time QCD provision allows an individual to receive an income benefit for their lifetime with the remainder going to charity after they pass away. Given the $50,000 limit, it is likely that this new provision will be most effective with CGAs—since charitable remainder trusts typically involve greater cost and administrative burden.

By making a QCD, individuals can avoid being taxed on the distribution at higher ordinary income tax rates. In addition, by reducing adjusted gross income with a QCD, an individual may reduce the amount of their income, subject to the 3.8% net investment income tax, and they may also end up in a lower overall tax bracket, which could increase their eligibility for certain tax credits and deductions.

Increased Benefits Related to Education

Related: Revised Retirement Rules in the SECURE Act 2.0

There is a new provision that permits certain beneficiaries to roll over up to a lifetime limit of $35,000 from their 529 college savings plan to a Roth IRA—100% free of any tax or penalties. The good news for parents or grandparents funding 529 plans for loved ones is that this new rule could provide additional flexibility down the road for beneficiaries with 529 plans that are overfunded. However, there are several limitations to this new provision, such as:

1.  The 529 plan must be open for at least 15 years;
2. Any contributions to the 529 plan within the last five years (and the earnings on those contributions) are ineligible to be rolled over to a Roth IRA; and
3. The amount that can be rolled over to a Roth IRA is limited each year based on annual contribution limitations (currently, $6,500 for 2023 or $7,500 if age 50 or older), which will apply to the aggregate of any rolled-over amounts from 529 plans plus any other contributed funds.

Starting in 2024, employers can choose to match student loan payments with contributions to an employee’s retirement plan. As a result, an employee won’t miss out on an employer’s match because of their decision to pay down student debt instead of saving for retirement.

The SECURE Act 2.0 contains more than 90 retirement provisions. In addition to the previous key provisions, some additional important changes include:

1. No mandatory RMDs from 401(k), 403(b) or 457(b) Roth accounts. To better align the Roth IRA rules with Roth accounts maintained under a 401(k), 403(b) or governmental 457(b) plan, RMDs beginning in 2024 will no longer be required from a designated Roth account to a participant during the participant’s lifetime— except for RMDs due by April 1 for those reaching their RMD age prior to 2024. The RMD rules that are applicable upon a participant’s death still apply;  
2. Effective immediately, an employee may elect to have employer matching or nonelective contributions made on a Roth basis—meaning after-tax—to the extent permitted by a plan;
3. Currently, if an individual fails to take their RMD from a retirement plan, they will be subject to an excise tax of 50% of the RMD amount that should have been distributed. Effective on Jan. 1, 2023, that excise tax is reduced to 25%. The excise tax is further reduced to 10%, if the individual: (1) receives all their past-due RMDs; and, (2) files a tax return paying such tax before receiving notice of assessment of the RMD excise tax and within two years after the year of the missed RMD;
4. For most 401(k) and 403(b) plans starting with the 2025 plan year, newly eligible employees must be automatically enrolled at a rate of at least 3% of pay with an automatic annual increase of at least 1%, until the participant reaches a contribution level of at least 10% of pay. Certain exceptions apply to governmental plans, plans of small businesses with 10 or fewer employees, and plans of new employers in business for less than three years; and
5. For economic losses in connection with a federal disaster after Jan. 25, 2021, participants can withdrawal up to $22,000 without a 10% early withdrawal penalty and may repay such withdrawal within three years to avoid income tax. In addition, such participants can take a loan from a defined contribution plan up to the lesser of $100,000 or 100% of the balance, and can delay repayment for one year.

Despite expectations, based on proposed legislation, the new SECURE Act 2.0 does not address several topics such as:

• Addressing whether annual RMDs are required for certain inherited IRAs during the 10-year period after the original owner’s death;
• Creating any mandatory RMDs based on large balances accumulated in retirement accounts;
• Eliminating new types of investments from being purchased by an IRA or Roth IRA—such as privately held investments;
• Addressing the use of so-called backdoor Roth IRAs;
• Changing limitations on Roth IRA conversions;
• Changing the minimum age of 70½ for QCDs; and
• Implementing any new restrictions on qualified small business stock (QSBS) under section 1202.

This a huge bill and this summary highlights only a few aspects of the SECURE Act 2.0. To determine how these new provisions may impact you and your financial goals, you should reach out to your tax advisor. 

Matthew Erskine is managing partner at Erskine & Erskine.