When Congress approved the $1.7trillion omnibus spending bill in December of 2022, much of the focus was on the size of the spending that would occur funding the government through September 30, 2023. While that is surely important, buried inside the bill was also legislation that would affect Americans everywhere. The SECURE 2.0 Act is now law and touches Americans at all stages of life. The SECURE 2.0 Act contains many changes to existing law including changes to RMD ages, differences in catch-up contributions to retirement plans, and modifications to many areas including 529 plans. Here are some highlights on the major changes from SECURE 2.0.
- RMD ages increasing- The age for a Required Minimum Distribution (RMD) increases to 73 starting January 1, 2023. If you turned 72 in 2022 or earlier, you need to continue taking RMDs as scheduled. Starting in 2033, the age for RMDs will increase to 75.
- RMD Penalties Decrease- Penalties for failing to complete an RMD decreases from 50% of the amount not withdrawn to only 25. That penalty further decreases to 10% if the RMD is taken and an amended tax return is filed.
- Higher catch-up contributions- Starting in 2025, individuals between 60 and 63 years old will be able to make catch-up contributions up to $10,000 to a workplace plan, and that amount will be indexed to inflation.
- If you make more than $145,000 per year, the catch-up contribution must be made “after-tax” (on a ROTH) basis.
- IRAs currently have a $1,000 catch-up contribution, and this amount will be indexed to inflation starting in 2024
- Changes to Roth accounts in workplace plans-
- Employees will be able to designate the contributions their employer makes to them in their Roth account. Historically, this always occurred on a pre-tax basis. Employers will still be receiving the pre-tax benefit to them, but the dollar amount would flow down to the employee. It will likely take some time for payroll providers to enact this change.
- Starting in 2024, Roth account balances inside of a workplace retirement plan can be excluded from an RMD calculation. Currently, RMDs from workplace plans include Roth account balances.
- New options for Qualified Charitable Deductions (QCDs)- Beginning in 2023, QCDs can be made up to $50,000 annually to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. These were previously not allowed to qualify under QCDs.
- Changes to Qualified Longevity Annuity Contracts (QLACs)- QLACs are deferred income annuities purchased from money within an IRA or workplace retirement plan that begin payments on or before age 85. The premium cap was increased to $200,000 and removes the 25% limit of total funds. QLACs don’t require RMDs until 85.
- Automatic enrollment in retirement plans- Starting in 2025, retirement plans are required to have automatic enrollment at 3% rate for eligible employees. This was previously only an option.
- Emergency savings- Defined contribution plans would have the option to establish Roth savings accounts within them that would be eligible for the employer match. Employees could contribute up to $2,500 per year into it and have the first four withdrawals be penalty and tax free in an effort to increase emergency savings.
- Student Loan Debt- Starting in 2024, employers would be able to “match” payments by employees with student loan debt.
- 529 plans- After a 529 plan has been established for 15 years, 529 plan assets could be rolled over into a Roth IRA for the beneficiary, subject to contribution limits and an aggregative lifetime limit of $35,000. The rollover is treated as a contribution to the account.
The changes to the SECURE 2.0 Act are wide and varied and will affect many people differently. If you have any questions on how you or your workplace might be affected by these changes, please contact your advisor for a more in-depth discussion.