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Secure 2.0 Act: Key Takeaways Affecting Retirement Plans
By Lauren Surdyke on January 6, 2023 at 9:45 AM

The SECURE 2.0 Act of 2022, signed into law by President Joe Biden on December 29, 2022, makes significant changes to the administration and taxation of retirement plans. It addresses many practical concerns that surfaced after the passage of the original SECURE Act in 2019 and during the pandemic. Some of the key changes are set out below.

Changes to Required Minimum Distribution (RMD) Rules. SECURE 2.0 increases the age at which plan participants must begin taking RMDs. In 2022, individuals were required to begin receiving RMDs upon reaching age 72. SECURE 2.0 increases the RMD age to age 73 on January 1, 2023, and age 75 on January 1, 2033.

Prior to SECURE 2.0, the Internal Revenue Code imposed a 50 percent penalty on RMDs not distributed during any year after the participant attains RMD age. Under SECURE 2.0, the penalty for failing to take an RMD decreased from 50 percent to 25 percent, and if corrected in a timely manner, to 10 percent.

Effective in 2024, Roth accounts in employer retirement plans will be exempt from RMD requirements. This is consistent with treatment of Roth IRAs, which are already exempt from RMD requirements.

Rules for Surviving Spouses. If a participant dies before reaching the RMD age and designates a spouse as the sole beneficiary, then the spouse may make an irrevocable election to be treated as the participant for purposes of receiving RMDs. This will allow the surviving spouse to defer RMDs until reaching the RMD age.

Catch-up Contribution Rules. Catch-up contributions will increase beginning in 2025 for 401(k), 403(b), governmental and IRA account owners. For traditional and Roth IRAs, individuals age 50 and older may contribute an extra $1,000 annually, and SECURE 2.0 added a provision allowing this $1,000 amount to be adjusted annually for inflation.

SECURE 2.0 increases the catch-up contribution amount for 2023 to $7,500 (from $6,500 in 2022). It also adds a special catch-up contribution for participants ages 60 to 63 for the greater of $10,000 (adjusted annually for inflation) or 150 percent of the regular catch-up contribution amount for 2024.

One caveat to the catch-up contribution rules: Beginning in 2024, if a participant has wages over $145,000 during the previous year, all catch-up contributions must be deposited into a Roth account. The $145,000 wage threshold will be adjusted annually for inflation.

Qualified Charitable Distributions. Seniors have the option to use annual charitable donations up to $100,000 to lower RMDs. SECURE 2.0 allows the $100,000 amount to be adjusted annually for inflation, beginning in 2024. In addition, beginning this year, individuals can reduce RMDs by making a one-time qualified charitable distribution of up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity.

Student Loan Payments. Effective in 2024, employer-sponsored plans may consider certain student loan payments as elective deferrals for purposes of employer matching programs. This will permit plan sponsors to make matching contributions based on an employee’s qualified student loan payments.

Expanded Automatic Enrollment in New Employer Retirement Plans. Beginning in 2025, new 401(k) and 403(b) plans must automatically enroll eligible participants. Participants are able to opt out of participation. In addition, employers are now able to offer de minimis financial incentives, such as low-dollar gift cards, to encourage employee participation in workplace retirement plans.

529 Plans. Beginning in 2024, beneficiaries of certain 529 college savings plans that have been open for more than 15 years may roll over up to $35,000 from the 529 plan to a Roth IRA during their lifetime (subject to Roth IRA contribution rules).

Expanded Access to Retirement Funds. Beginning in 2024, employer retirement plans can add an emergency savings account option (designated as a Roth account) in which non-highly compensated employees can contribute up to $2,500 per year. Participants can make up to four tax-free withdrawals annually. SECURE 2.0 permits individuals to withdraw up to $1,000 annually for hardship. It also eliminates the penalty for early withdrawal by terminally ill individuals and allows victims of domestic violence to withdraw up to $10,000 without penalty.

This list of changes is not intended to be an exhaustive inventory of SECURE 2.0. Because of the wide scope of reform, you should consult with your attorney and tax advisor to review the impact of SECURE 2.0 and planning opportunities.

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