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What does the Secure Act 2.0 Mean to Me? Thumbnail

What does the Secure Act 2.0 Mean to Me?

Retirement Taxes

The Secure Act 2.0 (“Secure 2.0”) was passed in December of 2022 and contains some material but not monumental changes to the tax code.  The impacts are primarily around retirement accounts from both the personal and business perspective.  Let’s take a look at some of the changes and review how it might impact your planning. 

Individual provisions

  • Later age for required minimum distributions (RMDs).  SECURE 2.0 pushes the RMD age back from age 72.   The RMD age will vary based on one’s date of birth.  It will be age 73 beginning in 2023 and will be age 75 in 2033.  While this will not have a huge impact, it may open the door for more Roth IRA conversions for certain taxpayers. ( As my clients know, that certainly gets me excited.)  It may also require you to revisit your withdrawal strategy for those applicable years.   As you might recall, the RMD age was merely age 70 ½ prior to the 2019 SECURE Act.
  • Reduction in the RMD excise tax.  The penalty for failing to pay the full RMD in a timely manner has been reduced to 25% of the amount not taken in 2023.  While we generally work with our clients to ensure this penalty does not apply, it has been triggered by other taxpayers in the past when the penalty was at an egregious 50% rate.  This penalty tax is further reduced to 10% if account holders take the full required amount and report the tax by the end of the second year after it was due and before the IRS demands payment.  This should be a non-issue if you are paying attention.
  • No RMD requirement from Roth 401(k) accounts.  This law was long overdue and brings Roth 401(k)s and similar employer plans in line with Roth IRAs.  Like Roth IRAs, this law now eliminates the distribution requirements of Roth 401(k)s.  This might be one of many factors in deciding whether to rollover a 401(k) to an IRA.
  • Higher limits and looser restrictions on qualified charitable distributions from IRAs.  The amount a taxpayer can gift as a qualified charitable distribution from an IRA ($100,000) will now be indexed for inflation, starting in 2024.   This technique has been quite advantageous for many of our clients, and we will continue to use it.  While it is generally rare for taxpayers QCD gifts to exceed $100,000, it is good to know that this will gradually be increased for those that make significant charitable contributions.  In addition, beginning in 2023, investors will be able to make a one-time charitable distribution of up to $50,000 from an IRA to more advanced charitable strategies and vehicles (e.g., charitable remainder trusts.).  Due to the cost of implementation and administration costs of such advanced strategies, this additional law will generally only be relevant for those who are already using these advanced strategies.  Think high dollar charitable contributions.
  • Higher catch-up contributions for IRAs and workplace retirement plans.  This law does have some significance, and it definitely adds unnecessary complexity into the tax code and tax planning.  The IRA catch-up contribution limit will be indexed annually for inflation, staring in 2025. While the IRA catch-up contribution amount is currently at $1,000, it will be slightly higher in 2025 and beyond due to inflation adjustments.  (Congress should have had that as part of the law originally.)  For workplace retirement plans, there were a few changes.  First, the basic catch-up contribution was increased to $7,500 (from $6,500) for those at the eligible age (age 50 and beyond), starting in 2023.   Adding more complexity to these rules, Congress decided to increase the catch-up contributions even more for those age 60 to 63, starting in 2025.  The catch-up amount for those individuals is $10,000 for 401(k) types of plans.  (The amount is $5,000 for SIMPLE plans.)   
  • Catch-up contributions will go into a Roth.  The bigger change in law which will likely impact many of our clients and readers is the requirement that beginning in 2024 the catch-up contributions will have to be to the Roth bucket of the 401(k)s (i.e., after tax) for those taxpayer’s that had wages more than $145,000 (inflation-adjusted).  While it will still be beneficial for many taxpayers with adequate cash flow to save to the Roth bucket rather than to their taxable accounts, this should still be evaluated for one’s specific situation.   Unfortunately, it will likely be disadvantageous for those taxpayers that are nearing retirement and are in their peak earning years.
  • Matching contributions may go to Roth accounts.  SECURE 2.0 allows employer matches to be made to Roth accounts.  Previously, employer matches had to go into an employee's pre-tax account.  (The employer’s plan must obviously be amended before this option is available to you, of course.)  This is quite a win for taxpayers where it otherwise makes sense to contribute to Roth accounts.  This decision should be reviewed by looking at your situation over a multi-year basis.
  • Automatic enrollment and automatic saving increases to workplace retirement plans.  In order to encourage more participation into retirement savings, the SECURE 2.0 requires most new employer plans to provide for automatic enrollment for employees. While this likely won’t impact our clients and most of our readers as you are likely participating in your retirement plans, this is a win for the American public as it will provide a nice nudge for the American employee to take accountability for their own retirement.  It will require everyone to understand what their employer’s plans auto-enrollment percentage is and ensure their cash flow situation allows for such contributions.  One can always opt out, but hopefully most employees will find a way to contribute.  
  • Emergency savings accounts option with employer retirement plans.  The legislation includes measures that permit employers to automatically enroll non-highly compensated workers into emergency savings accounts to set aside up to $2,500 (or a lower amount that an employer stipulates) in a Roth-type account.  Savings above this limit and any employer matching contributions would go into the traditional retirement account.
  • Matching contributions for qualified student loan repayments.  Employers may help workers repaying qualified student loans simultaneously save for retirement by investing matching contributions in a retirement account in the employee's name.
  • 529 rollovers to Roth IRAs.  Individuals will be able to roll over up to a total of $35,000 (lifetime) from 529 plan accounts to Roth IRAs for the same beneficiary, provided the 529 accounts have been held for at least 15 years.  The amount that can be rolled over any one year per beneficiary is subject to Roth IRA contribution limits.  Thus, if a beneficiary contributes the maximum amount (e.g., $6,500) one year, then no more funds from the 529 Plan to a Roth IRA for that beneficiary could be made.  Unless the IRS provides regulations to the contrary, it does not appear that Adjusted Gross Income limitations will apply on such transfers.  This new legislation does indeed provide some planning opportunities. We often recommend not overfunding 529 Plans since we generally want to avoid a 10% penalty on the earnings and avoid having the earnings be subject to ordinary income taxes upon a distribution from the 529 Plan for non-qualified purposes (i.e., non-educational).  At a minimum, this increased flexibility should allow one to provide an “escape hatch” for slightly overfunded 529 Plans.  Rather than having the 10% penalty and income tax apply, $35,000 can be transferred to a Roth IRA, providing a kickstart for the beneficiary’s own retirement.  Beyond the benefits of providing such escape hatch, perhaps taxpayers now intentionally overfund the 529 Plan to a degree in order to allow the beneficiary the ability to get funds into the Roth IRA.  Moreover, this legislation appears to allow the contributor to rename him- or herself as beneficiary and rollover the funds to his or her Roth IRA.  It is uncertain if a new 15-year rule would apply upon such renaming of the beneficiary.  There are a host of other planning issues and analysis that apply to this one little change in laws, but we will save that for another day.
  • New exceptions to the 10% early-withdrawal penalty.  Distributions from retirement savings accounts prior to age 59½ may be subject to an early-withdrawal penalty of 10%, unless an exception applies.  SECURE 2.0 provides for new exceptions to this early-withdrawal penalty.  These are generally limited and are arguably not provisions you want to have to take advantage of. 
  • Saver's Match replaces the Saver’s Credit in 2027.  Beginning in 2027, the Saver’s Match will be available for low- and moderate-income savers.  A taxpayer will receive a match of 50% up to $1,000 ($2,000 for married couples filing jointly) for saving to a retirement account, generally to be contributed directly into an individual's retirement account.  The phase-out of the match is between $20,500 to $35,500 for single filers and $41,000 and $71,000 for joint filers.  In contrast to the Saver’s Credit that exists through 2026, the match is allowed even if taxpayers have no income tax obligation.  While this credit won’t apply to most of our client’s and readers, this could be quite beneficial for your children that are just starting a career or for those in semi-retirement that perhaps have income below the thresholds.  Additional tax planning may be warranted to reduce the taxpayer’s modified AGI.  Note that taxpayers under 18, full-time students, or anyone claimed as a dependent on another’s tax return aren't eligible for the Saver’s Match.

 Impact on businesses retirement plans 

  • SIMPLE IRAs and SEP IRAS – Roth option.  SEP IRAs and SIMPLE IRAs are now permitted to be designated as Roth IRAs, providing a big boost to these plans that can serve as a cost-effective way for small business owners to save for retirement.  As a result, these should increase in popularity and could be a big win for younger employees.
  • More part-time employees can participate in retirement plans.  The SECURE Act of 2019 required employers to allow workers who clocked at least 500 hours for three consecutive years to participate in a retirement savings plan.  Beginning in 2025, employers must allow workers who worked 500 or more hours for two consecutive years to participate in a retirement savings plan.  As mentioned, the previous law was three consecutive years.  This may add slightly to the costs of establishing retirement plans by employers, especially those with more part-time workers, but it could certainly slightly benefit part-time workers by getting them to participate in more savings.
  • Increased amounts for Qualified Longevity Annuity Contracts.  SECURE 2.0 increased the amount to $200,000 that plan participants can use to purchase qualified longevity annuity contracts.  The former amount was capped at the lesser of 25% of the value of the retirement accounts or $145,000. While we are not overly bullish on the use of QLACs, it could be an option for providing for longevity insurance while allowing RMDs to be postponed until age 85.  

These provisions represent just a sampling of the many changes that will be brought about by SECURE 2.0.  We look forward to providing more details and in-depth analysis applying to both individuals and business owners in the weeks to come.