SECURE 2.0 IS HERE
The SECURE Act (the “Secure Act”) was enacted by Congress in 2019 with the goal of improving retirement savings for Americans. Specifically, the Secure Act was intended to encourage more employers to offer retirement savings accounts and to encourage more individuals to take advantage of employer plans, and to open individual retirement accounts outside of employer plans. Although the Secure Act was a step forward, there was room for improvement. In late December 2022, the sweeping Consolidated Appropriations Act of 2023, which included the SECURE 2.0 Act of 2022 (“Secure 2.0”), was signed into law. Secure 2.0 is made up of 92 individual provisions intended to modify and improve the Secure Act to better achieve the above-stated goals. Here is a brief overview of some of the changes that may impact you and your retirement:
Required Minimum Distributions (“RMDs”)
- The Secure Act raised the withdrawal age for RMDs from retirement accounts from age 70.5 to 72. Beginning in 2023, Secure 2.0 further raises the age to 73 and in 2033 the age will again be raised to 75.
- Under the Secure Act, failure to take an RMD would cause a person to incur a penalty of fifty (50%) percent of the RMD amount. Secure 2.0 reduces this penalty to twenty-five (25%) percent. Moreover, if the error is corrected in a timely manner and was associated with an IRA, the penalty is further reduced to ten (10%) percent upon the timely submission of a corrected tax return.
- Beginning in 2024, Roth accounts in employer retirement plans will no longer require RMDs.
Expansion of Catch-Up Contributions
- Under the Secure Act, upon attaining the age of 50 a person could contribute up to $6,500 to his or her 401(k) annually, above and beyond the maximum allowable annual contribution. Under Secure 2.0, beginning in 2025 individuals aged 60 to 63 may make catch-up contributions to 401(k) accounts up to an additional $10,000 per year (indexed for inflation).
Expansion of Employer Matching Options
- Under Secure 2.0 employers now have the option of making matching retirement contributions to pre-tax 401(k) accounts, or to post-tax Roth accounts. Previously, employer matching plans were limited to pre-tax accounts.
- In an effort to assist individuals who are overwhelmed by student loan debt to contribute to retirement while paying off such loans, beginning in 2024, employers will be able to "match" qualified student loan payments made by employees by making a matching contribution to a retirement account.
Increased Access to Employer Retirement Accounts
- Starting in 2025, employers offering 401(k) or 403(b) plans will be required to automatically enroll employees, if and when the employee becomes eligible. The initial automatic enrollment amount would be at least 3% but no more than 10% of the employee’s salary. In each following year, the contribution amount is increased by 1% up to a maximum of 15%. The employee is able to opt out of the plan, if they so choose, and businesses with 10 or less employees, businesses less than three years old, religious plans, and government plans, are exempt from the provision.
- Secure 2.0 provides that part-time workers who work between 500 and 999 hours a year for two consecutive years will be eligible to participate in an employer’s 401(k) plan. Under the Secure Act, employees were required to wait three years.
- Due to the transient nature of military service, many military spouses are unable to become eligible for a company’s retirement plan. To help remedy this issue, Secure 2.0 provides a tax credit for small businesses if they: 1) make military spouses eligible to contribute to the employer retirement plan within two months of being hired; 2) upon eligibility make such spouse eligible for employer matching; and 3) allow the spouse to be immediately vested in such contributions.
Increased Ability to Save for and Withdraw Funds for Emergency Expenses
Secure 2.0 allows individuals under age 59.5 to take up to $1,000 from a 401(k) or IRA for emergency expenses without incurring the standard ten (10%) percent penalty for early withdrawal. The withdrawal may be paid back within three (3) years from the date of withdrawal and no further emergency funds can be taken from the account until the initial distribution is repaid.
- Secure 2.0 provides employers the option to allow employees to set up an emergency savings account through automatic payroll deductions. Employers may automatically opt employees into the program but may not allocate more than three (3%) percent of such employee’s salary to such fund. Such contributions are capped at $2,500.
- Beginning in 2024, survivors of domestic abuse will be able to withdraw the lesser of $10,000 or fifty (50%) percent of their retirement account without penalty. Individuals may self-certify their status as domestic abuse survivors.
- Victims of a qualified federally declared natural disaster may withdraw up to $22,000 from their retirement account without penalty. The distribution will be treated as gross income and may be taxed over a three-year period.
- Individuals below the age of 59.5 with a terminal illness may withdraw funds without a ten (10%) percent early withdrawal penalty.
Expansion of Qualified Longevity Annuity Contracts
- A qualified longevity annuity contract (“QLAC”) is a deferred annuity that begins paying out at the end of an individual’s life expectancy. Prior to Secure 2.0, the maximum amount that could be contributed to a QLAC was the lesser of $135,000 or twenty-five (25%) percent of the value of a person’s retirement account. Secure 2.0 repeals the twenty-five (25%) percent limit and increases the contribution to $200,000, indexed for inflation.
Added Flexibility to 529 Plans
- Before Secure 2.0, funds placed in a 529 college savings account must either be used for qualified educational expenses or incur a penalty and be taxed upon being withdrawn. These restrictions have had a chilling effect on parents and students who do not want such funds to be trapped in a 529 account in the event that the student either does not attend college or finds an alternative way to pay for his or her education (i.e. scholarships or grants).
- Secure 2.0 amends the Internal Revenue Code to permit beneficiaries of 529 accounts to rollover such funds to a Roth IRA for the benefit of the student free of tax and penalty, if certain conditions are met:
- The 529 account must have been open for more than 15 years;
The rollovers are subject to Roth IRA annual contribution limits;
- Rollovers are capped at $35,000; and
- The 529 plan funds can be rolled over the course of the beneficiary’s lifetime.
The above outline is by no means an exhaustive list of the changes made to the Secure Act or the ways Secure 2.0 may have an impact on your retirement planning. If you would like to speak to a professional who can offer you advice tailored to your unique circumstances, please contact one of the knowledgeable attorneys at Pashman Stein Walder Hayden.