(Posted February 2023)

The Secure Act 2.0 has some noteworthy provisions related to rules changes for 401(k) and other Retirements Accounts. It may be noted that this law was passed towards the tail end of earlier 116th Congress, and many of the affected entities and institutions are still unpacking all the provisions in the Act. Several of the Act’s provisions came into effective immediately, after President Biden signed into law this SECURE 2.0 Act of 2022 as part of the Consolidated Appropriations Act, 2023, on December 29, 2022.

Based on what we have seen in the provisions of this Act, Congress made some major changes to the rules governing retirement savings accounts by pushing back the start of required minimum distributions (RMDs) for retirees, raising catch-up contribution limits for retirement plans, and making workplace retirement plans more flexible.  We have attempted to enumerate said highlights here:

1. RMD Age has been raised: This 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. 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.
2. Higher Catch-Up Contributions in Early 60s: 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.
3. Emergency 401(k) and IRA Withdrawals will now be allowed without penalty in specified cases: Emergency 401(k) and IRA plan withdrawals of up to $1,000 annually are permitted when unforeseeable or immediate family expenses arise. The distributions are not subject to the 10% early withdrawal penalty. Only one such distribution may be made in a year, and there is a right to “repay” for three years if desired.
4. Simple IRA and 401(k) Contributions have been increased: The allows employees to contribute $22,500 to qualified workplace retirement plans like a 401(k) or a 403(b) and if they’re 50 or over, standard catch-up contributions allow them to save an additional $7,500 per year. Additionally, this law has introduced a new category for 60 years and above, which has been described in 1. above
5. “Rothification” of “Catch-Up Contributions for High Earners: An important change in SECURE 2.0 is what some analysts are calling the Rothification of workplace retirement plans. When the Roth option was introduced to workplace retirement plans, it was beneficial to younger, lower-earning workers who contributed to their Retirement Account from lower tax rate paid after-tax Income. However, many workers—especially higher-income workers—continue to prefer the immediate benefit of making tax-deductible pre-tax contributions, since they were deferring income, that would be taxed at higher rate. Consequently, the government having to balance the competing goals of motivating more people to save for retirement and also receiving tax revenue sooner than later, SECURE 2.0 appears to have been designed with that latter goal in mind, pushing more high-income savers toward the Roth. Hence, 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.
6. Match Dollars can Now be Roth 401(k) also: This law now makes allows employers to make matching contributions to employees’ Roth 401(k)s which went into effect immediately upon passage of the act. However, it needs to be noted that that law stipulates that this employer match is optional.
7. Pension-Linked Emergency Savings Accounts: SECURE 2.0 provides emergency saving account options, where employees can automatically allocate a percentage of their income, saving up to $2,500 per year, to pay for emergency expenditures without tapping into a retirement fund.
8. Employer-matching for Student Loan Payments: Beginning in 2024, employers will have the option to match their employee’s student loan payments as if they are payments to a qualified retirement plan.
9. Qualifying Longevity Annuity Contracts (QLACs) changes: Prior to SECURE 2.0, the amount of money from anyone 401(k) or IRA that could be put into an annuity contract known as a QLAC was limited to either $135,000 or 25% of the value of the retirement accounts, whichever is less. This new legislation removes the 25% limit and increases the allowable QLAC amount to $200,000 (indexed to inflation).
10. Qualified Charitable Distribution (QCD) limit changes: A QCD allows IRA owners age 70½ and older to donate up to $100,000 each year to qualified charities through a non-taxable distribution from their IRA. (These distributions can satisfy all or a portion of that person’s RMD). SECURE 2.0 indexes the current $100,000 annual limit to inflation starting in 2023 and allows a onetime QCD of $50,000 to charity via a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust.

Please note that article / blog post is for informational purposes only, and is not intended to provide, and should not be relied on for Accounting, Financial, Retirement, Legal and/or Tax advice.

Consequently, the information provided here does not constitute any form of Accounting, Financial, Retirement and /or Tax Advice and we strongly urge you to work with an Accountant, Lawyer, Financial Planner and/or Advisor to create a plan to manage your income and taxes according to your circumstance, needs and savings.