In 2019, Congress passed the “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act). It had 29 provisions to change the rules governing retirement savings. On December 29, 2022, as part of a bill to provide funding for the government, Congress greatly expanded the changes to retirement savings by passing the SECURE Act 2.0, which introduced 92 new rule changes. This new legislation dramatically increases the complexity of the rules for retirement and this blog will only cover some of the major provisions.
In this blog, you’ll learn:
- New Distribution Rules
- New Accumulation Rules
- Revised Roth Rules
- More Highlights
New Distribution Rules
Required Minimum Distributions (RMDs) - One of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). Perhaps the easiest way to understand the changes in the new minimum required age for taking distributions is by the year a person is born.
Access to Funds - New rules allow distributions without penalties for situations with a terminal illness. Starting on December 29, 2025, new rules also allow for the distribution of money for some qualified long-term care situations. Retroactive for disasters occurring on or after January 26, 2021, new rules allow up to $22,000 to be taken out of plans if a person’s primary residence is located in a Federal Disaster area.
Reduced Penalty - Starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake during a period called a “Correction Window”, the penalty may drop to 10%.
New Accumulation Rules
Catch-Up Contributions - The catch-up amount for people aged 50 and older in 2023 is $7,500. Starting in 2024, the IRA Catch-up Contribution Limit will be indexed for inflation in increments of $100. Starting on January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. Effective in 2024, individuals in non-SIMPLE IRA plans, earning more than $145,000 annually, are required to put their catch-up contribution in the Roth Option for their plan.
Automatic Enrollment - Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. However, employees can choose to opt-out.
Student Loan Matching - In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.
Revised Roth Rules
529 to a Roth - Starting in 2024, money can be moved directly from a 529 plan to a Roth IRA.
Rules involved include:
- Roth IRA receiving the funds must be in the same name as the beneficiary of the 529 plan
- Both 529 contributions and earnings can go into the Roth IRA
- Beneficiary must have compensation
- 529 plan must have been maintained for 15 years or longer
- Any contributions to the 529 within the last 5 years (and the earnings on those contributions) are ineligible to be moved to a Roth IRA
- Amount that can be rolled over each year is subject to the annual Roth IRA contribution limit
- Maximum lifetime transfer to the beneficiary is $35,000
- Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings
- Original Roth IRA owner is not required to take minimum annual withdrawals.
So, if your child or grandchild gets a scholarship, goes to a less expensive school, or doesn't go to school, the money can get repositioned into a Roth IRA account.
SIMPLE and SEP - From 2023 onward, employers can add the Roth contribution option to their company retirement plan for SIMPLE IRAs and SEP IRAs.
Roth 401(k) and Roth 403(b) - The new legislation aligns the rules for Roth 401(k)s and Roth 401(b)s with Roth Individual Retirement Account (IRA) rules. From 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.he catch-up amount for people aged 50 and older in 2023 is $7,500. Starting in 2024, the IRA
Qualified Charitable Donations (QCD) - From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is 70½ years old and older can make a QCD as long as it remains under the limit.
Support for Small Businesses - In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.
Starter 401(k) - Starting in 2024, employers who do not already offer retirement plans will be permitted to offer a starter 401(k) plan or safe harbor 403(b) plan to employees who meet age and service requirements. The plan provides an entry point for small businesses given that employers are not required to match contributions.
There are many additional provisions in the SECURE Act 2.0 that are too numerous to mention. Most of these are for specialized situations or limited groups of people. If you have questions about any of these rules, call your Wealth Manager.
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Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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1 United States Senate Committee on Finance - Secure 2.0_Section by Section Summary 112-19-2022 Final