How the SECURE 2.0 Act May Change Your Retirement Plans

Provisions included in a last-minute spending bill passed last year will usher in big changes to the rules for RMDs, 401(k)s, and more.

As the clock wound down in 2022, Congress made some major changes to the rules governing retirement savings accounts. Among other improvements, the legislation known as the SECURE 2.0 Act of 2022 pushes back the start of required minimum distributions (RMDs) for retirees, raises catch-up contribution limits for retirement plans, and makes workplace retirement plans more flexible.

Before getting into some of the highlights, it's worth noting that because this law passed at the tail end of the legislative session, many of the affected agencies and institutions haven't yet fully digested all the new provisions. Some of the law's wording still needs to be interpreted, and in some cases, financial institutions and plan managers may have even printed—and sent—year-end documentation reflecting the rules that existed before the law was passed. So, be careful when reviewing any material about the rules governing topics such as RMDs and retirement savings. It may take some time for all the changes in SECURE 2.0 to be fully worked out.

Now, here are some things to know about how these changes could impact those saving for retirement, as well as those already in it.

New RMD rules

What changed? Effective this year, the legislation raises the starting age for RMDs from tax-deferred retirement accounts to 73, from 72 previously. Then, in 2033, the starting age will increase again to 75. There is still an exception for your first RMD, which allows you to delay your distribution until April 1 of the year following your 73rd birthday. However, delaying would mean taking your first and second RMDs in the same tax year, potentially resulting in a large tax hit.

Note: If you turned 72 in 2022, you won't get a break under SECURE 2.0, based on our current understanding of the law. If you haven't taken your first RMD yet, you will still have to do so by April 1 of this year. As noted, you will also have to take your 2023 distribution within the calendar year.

Meanwhile, the 50% penalty for failing to take your RMD will fall to 25% this year. In addition, if you correct an RMD mistake in a timely fashion, the penalty is further reduced to 10%.

Finally, the law also does away with RMDs for Roth 401(k)s, but this doesn't take effect until 2024, so you'll still need to take an RMD in 2023.

New catch-up retirement contribution rules

What changed? Starting in 2025, the law will also allow workers aged 60 through 63 to make a larger catch-up contribution to certain retirement plans. For qualified plans, such as a 401(k) and 403(b), the additional limit will be 150% of whatever the regular catch-up amount is for a given year, or $10,000—whichever is greater. For SIMPLE plans, the additional limit will be 150% of whatever the regular catch-up amount is for a given year, or $5,000—whichever is greater.

This represents an addition to existing rules that allow workers to make catch-up contributions starting at age 50. For example, in 2023, most workers can contribute up to $22,500 to a 401(k), while workers aged 50 and older can contribute an additional $7,500, for a total of $30,000. If the new provision from SECURE 2.0 were effective today, a 62-year-old could contribute $22,500 to a 401(k), plus 150% of the regular $7,500 catch-up contribution, or $11,250 ($7,500 X 1.5%)—for a total of $33,750.

Finally, all catch-up contribution limits will be indexed to inflation. This includes IRA catch-up contributions, with effect from 2024.

There is one catch: Also starting in 2024, if you make more than $145,000, all your catch-up contributions will need to be made to a Roth account, using after-tax dollars.

This provision enhances the role of Roth accounts in retirement planning. For those who believe they'll be in a higher tax bracket in retirement than they are now, this could be a good change.

Qualified Charitable Distribution (QCD) limit changes

What changed? A QCD allows IRA owners age 70.5 and older to donate up to $100,000 each year to qualified charities through a non-taxable distribution from their IRA. (You can also make these distributions to satisfy all or a portion of your RMD.) SECURE 2.0 indexes the current $100,000 annual limit to inflation starting in 2023.

As our client, you can count on Slaughter Associates to integrate these changes into your personal wealth path and keep up with any additional changes that may come. If you have any questions, please let us know.

Other significant provisions from SECURE 2.0

The three provisions mentioned above will be most impactful to our clients, however, there are some others that we see as potentially interesting, as well. They include:

• Individuals can roll up to $35,000 from a 529 Plan to a Roth IRA in the name of the student beneficiary. The 529 account must have been in existence for at least 15 years. That provision becomes effective in 2024 and contains some other limitations that may need individual advisement.
• Beginning in 2024, employers will have the option to match student loan payments with a contribution to the employee's retirement plan account. The goal is to help workers who are burdened by student loans and can't afford to make a contribution to their retirement plan by ensuring that they are accumulating some retirement savings even as they pay down their loans.
• Individuals can withdraw up to $22,000 from an employer-sponsored plan or an IRA for federally declared disasters.
• SECURE 2.0 also creates a "retirement savings lost and found" national database to help individuals find their benefits if they changed jobs, or if the company they worked for moved, changed its name, or merged with a different company.

As we mentioned at the beginning, much of the language within SECURE 2.0 is still being interpreted. As your wealth manager, we will keep a close watch for new developments and adjust accordingly to serve your best interests. If you’d like a better understanding of how these changes may impact you, please reach out to us with any questions.