Breaking down SECURE Act 2.0
On December 23, Congress passed the Consolidated Appropriations Act of 2023. This is what’s known as an “omnibus spending bill”. (The word omnibus means that multiple measures were packaged into a single document.) The bill authorizes $1.7 trillion in government spending on everything from disaster relief to supporting Ukraine to workplace protections for pregnant mothers.1 On December 29, President Biden signed the bill into law.1
As you can imagine, this was a massive bill. In fact, it contained over four thousand pages. That’s because, as an omnibus, it’s multiple bills combined into one. Among those many bills is one that will have a profound impact on retirement called SECURE Act 2.0.
Back in 2019, Congress passed a law known as the Setting Every Community Up for Retirement Act. This was the original SECURE Act. The law made important changes to IRAs and 401(k)s, among other things, and was designed to help more Americans save for retirement.
SECURE Act 2.0 widens the scope of several provisions from the original law. It also comes with a variety of new ones. To help you understand this law and how it may affect your finances, we’ve written this special letter. Now, as you’ve probably guessed, we’ve sent the following information to all our clients. So, while some of the information you’re about to read may not apply to you right now, it could apply to members of your family. If so, feel free to share this letter with them!
There’s a lot to unpack here, so please take a few minutes to read about these new provisions. Most are simple, and we’ve done our best to explain them all in plain English. But if you have any questions or concerns, please let us know.
Important Provisions of the SECURE Act
Before we dive in, understand that SECURE Act 2.0 is over 20,000 words long. That means there isn’t room to cover every aspect of the law, and many won’t apply to you anyway. So, what follows is a brief overview of the provisions that could affect your finances.
Are you ready? Then take a deep breath as we go over…
Changes to RMDs2
One of the most notable changes from the original SECURE Act was raising the age at which retirees need to take required minimum distributions or RMDs. SECURE Act 2.0 raises the age again. Beginning on January 1 of this year, retirees may now wait until age 73 (up from age 72). This is important because it gives retirees an additional year to benefit from the tax advantages that come with IRAs before making mandatory withdrawals. (Note that anyone who turned 72 last year will still need to continue taking RMDs as previously scheduled.)
Per the new law, the RMD age will increase to 75 beginning in 2033.
Another noteworthy change is the penalty applied to those who fail to take their RMD, or don’t withdraw enough. Previously, the penalty was 50% of what the retiree should have withdrawn. Beginning this year, that penalty has now been reduced to 25%. And if the mistake is corrected within the proper “Correction Window”, it will be reduced further to a mere 10%.
The Correction Window
The Correction Window is usually defined as beginning January 1st of the year following the year of the missed RMD and ending when a Notice of Deficiency is mailed to the taxpayer or penalty is assessed by the IRS.
Finally, the law eliminates the need to take RMDs for Roth IRAs that are inside qualified employer plans. What does that mean in English? It means that if a retiree owns a Roth IRA through their old employer, they need never make mandatory withdrawals during their lifetime. This change begins in 2024.
Note, of course, that regular Roth IRAs that are not part of an employer plan were never subject to RMDs to begin with, so this change does not apply.)
Changes to Catch-Up Contributions2
Under current law, employees aged fifty or older can make extra “catch-up” contributions of up to $7,500 per year to their 401(k) or 403(b). Beginning in 2025, individuals aged 60 through 63 will be able to contribute up to $10,000 annually. Furthermore, that amount will be indexed to inflation, meaning it will go up as inflation does.
For people who are 50 or older – but not between the ages of 60-63 – the catch-up limit will remain $7,500 per year.
People aged 50 and older who own IRAs can also make catch-up contributions, albeit at a smaller amount. Currently, the catch-up contribution limit for IRAs is $1,000 per year. In 2024, that number will be indexed to inflation, too. Again, that means the limit could increase each year as cost-of-living expenses rise.
Changes for Businesses2
Beginning in 2025, the law requires businesses to automatically enroll employees in any new 401(k) or 403(b). Furthermore, unless the employee opts out or elects to contribute a different amount, they would automatically contribute 3% of their pay.
Another change: Starting in 2024, employers can help workers with their student loan payments! Because it can be so difficult to both save for retirement and pay off college debt at the same time, employers can “match” an employee’s loan payment with an equal contribution to their retirement account. This is a great option for younger investors, so if this provision applies to you or a loved one, make sure to inquire whether your employer plans to take advantage of it! And business owners around the country will be looking to use this provision to compete and retain top talent.
Other Provisions to Note2
Here’s an interesting provision: Starting in 2024, individuals may transfer money from a 529 plan into a Roth IRA. This could be useful if you own a 529 plan that has more funds than you or your loved one needs to pay for an education. Think of it as a way to add more flexibility to your long-term finances.
It’s important to note, however, that this provision comes with a lot of terms and conditions. For example, the Roth IRA must be in the same name as the beneficiary of the 529 plan. Furthermore, no transfers can be made until the 529 plan has been maintained for at least fifteen years. There are also very specific limits on how much money can be rolled over. So, if you ever intend to make use of this provision, my advice is to talk to me first so my team can help you through the process.
Let’s move on to another interesting provision. As financial advisors, we’ve long recommended that all investors have a Rainy-Day Fund. But sometimes, even this isn’t enough to handle unexpected expenses, like a health crisis or loss of income. Under SECURE Act 2.0, it’s now easier to make use of your retirement savings in an emergency. Previously, there was a 10% penalty for withdrawing money from a retirement account prior to reaching age 59½. (This was to prevent people from using their retirement savings for something other than retirement.) However, there are some exceptions, such as when you need the money to pay for certain medical expenses. The new law has expanded the list of exceptions. Here are some examples where the 10% penalty no longer applies:
- Recovering from a natural disaster, like an earthquake or hurricane
- Dealing with a terminal illness
- Being the victim of domestic abuse
The law also allows for emergency withdrawals for any taxpayer who needs to meet “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”2 Now, what the law does not do is specify what situations qualify as an emergency. Instead, the law states that “the administrator of an…eligible retirement plan may rely on an employee’s written certification that the employee satisfies the conditions of the preceding sentence in determining whether any distribution is an emergency personal expense distribution.”2
We know – that sentence is Washington legalese at its finest. Basically, this means people just need to be reasonable at determining for themselves what qualifies as an emergency. For example, if a loved one has been injured in an accident? That’s an emergency. Desperately want to buy the newest PlayStation before it goes out of stock? Not an emergency.
Hopefully, you will never have to make use of this provision. But it’s nice to know that it’s there in case you ever do!
The final provision we want to address in this letter involves qualified charitable distributions or QCDs. A QCD is a direct transfer of funds from your IRA to a qualified charity. They are a popular tool for retirees who want to contribute to a worthy cause because QCDs also double as RMDs in most situations.
Under SECURE Act 2.0, people age 70½ and older may use a QCD to gift up to $50,000 to a beneficiary. This is a one-time deal, and several conditions must be met. So, again, if you want to take advantage of this provision, talk to me and my team first so we can help you navigate the rules and restrictions.
Lastly, the law also links the maximum annual QCD amount to inflation rather than capping it at $100,000 like before.
As you can see, SECURE Act 2.0 is loaded with provisions for those saving for retirement. So, again, if you have any questions or concerns, please don’t hesitate to contact us!
Of course, our team will continue pouring over these changes. If there is anything else we feel you need to know, we’ll reach out to you, or go over them with you during our next review.
In the meantime, remember that we’re here to help you work toward your financial goals. Please let us know if there’s ever anything we can do – in 2023 and beyond.
1 “Here’s what’s in the $1.7 trillion spending law,” CNN, December 29, 2022.
2 Text of “Consolidated Appropriations Act of 2023,” (beginning page 817), Congress.gov. https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf