How does SECURE 2.0 Reshape your Retirement?

Embedded within the year-end omnibus appropriations bill, the Setting Every Community Up for Retirement 2.0, or SECURE 2.0, was signed into law by President Biden avoiding a government shut down and providing big changes to how millions will plan for retirement moving forward. The bill itself is a staggering 4,000 pages, but here are the key changes that affect your retirement whether you are retired, almost retired, or have retirement in 40+ years.

For retirees and pre-retirees, SECURE 2.0 delivers a handful of changes that directly impact retirement planning for this demographic as they (mostly) take effect over the next 2 years.

Required Minimum Distribution Rules

Arguably the most immediate change is around RMDs as the starting age gets pushed back from the current age 72 to age 73 beginning in 2023 and gets pushed to age 75 in 2033. If you are turning 72 in 2023 and you do not need your RMD to satisfy an income need, congratulations! You can kick that can to 2024 and if you are turning 73 in 2033, then your RMD age will not begin until 2035.

Previously RMDs were required to be calculated and distributed from ROTH 401(k)s or other employer-sponsored retirement plans, but SECURE 2.0 has eliminated this rule and ROTH RMDs are no longer required in these plans.

Failing to satisfy an RMD in a given year used to carry a hefty penalty of 50% for every dollar that was not distributed, but that is being decreased to 25%, and if any unsatisfied amount is taken after the fact, then the penalty is only 10%.

Catch-Up Contributions Rules

The current IRA 50+ catch-up contribution amount has been the same for 15 years but beginning in 2024 the $1,000 catch-up amount will be indexed for inflation moving forward. This is a small change, yes, but a step in the right direction.

The 50+ catch-up contribution amount in defined contribution plans will be $7,500 starting in 2023, but those contributing to a company plan between ages 60-63 will have an increased catch-up amount to $10,000 starting in 2025.

There is another addition to the age 50+ catch-up contribution provision that requires an individual who earns greater than $145,000 in the previous calendar year to make all their catch-up contributions as ROTH contributions. If an individual makes less than $145,000 there is no ROTH requirement.

Qualified Charitable Contributions Rules

Those over 70.5 years old can make donations from their IRA accounts directly to the charity of their choice without increasing taxable income. When RMDs begin, this is a common strategy to lower the taxable income for an individual in a given year. The current limit is $100,000 but SECURE 2.0 doubles that to $200,000. Furthermore, starting in 2024 that amount will be indexed for inflation. It should be noted that QCDs to donor-advised funds or private foundations are still not allowed.

For those individuals who are just kicking off their careers or are established but still have a long-time horizon to retirement, there are a lot of good parts of this bill for you.

Matching ROTH Contributions

Prior to this bill, if an employee was contributing to a ROTH 401(k) and the employer offered a 4% match, that 4% match would have to be made on a pre-tax basis, meaning it would end up in the traditional 401(k) portion of the account. Employers may now (effective immediately) offer matching contributions within employer-sponsored plans to the post-tax ROTH account. The participants will be subject to income tax on these contributions.

Tax-Free Emergency Savings

401(k)s and other such defined contribution retirement plans are now able to add a designated ROTH account within their plan that is for emergency savings. The annual contribution limit is $2,500 (employer sets the rules) and four tax- and penalty-free withdrawals are allowed each year. Contributions may even be eligible for employer matching subject to plan guidelines. This is a great move to encourage participants to build emergency savings funds to plan for the short-term unknowns. This provision will begin in 2024.

College Savings to ROTH IRA Rollovers 

One of the challenges with funding a 529 college savings accounts was figuring out what to do if the plan was overfunded. This provision, starting in 2024 and assuming certain conditions are met, will give 529 plan beneficiaries (not owners) the ability to rollover a life-time max of $35,000 of plan assets from their 529 account to a ROTH IRA in their name.

There are a lot of conditions that comes with this provision, such as:

• The original 529 account must have been maintained for 15 years
• Contributions and earnings from such contributions from the previous 5 years cannot be transferred
• A rollover in any year is limited to the annual ROTH IRA contribution limits for that year (reduced by actual ROTH IRA contributions).

As of now there are no listed ROTH contribution income limits attached to this type of rollover.

Student Debt and Retirement Contributions

It’s becoming very common that younger generations are saving less for retirement because they are also dealing with the weight of student loan debt. This provision would allow employers to match employee student loan payments with contributions into their retirement plan.