As you may know, Congress recently passed a $1.7 trillion omnibus spending bill. Included within its 4,100+ pages is new retirement legislation known as the “SECURE 2.0 Act of 2022.”
Several months ago, I provided a preview of SECURE 2.0 based on initial legislation passed by the House of Representatives. As promised, I am following up now that SECURE 2.0 has been signed into law by President Biden. Likewise, I continue to focus on several key provisions that seem most relevant to people in or near retirement:
- New required beginning dates for required minimum distributions (RMDs): Prior to SECURE 2.0, one had to start making withdrawals from a tax-deferred retirement account at age 72. The new law increases that age to 73 starting in 2023 and increases the age further to 75 beginning in 2033.
- Elimination of RMDs for Roth employer retirement plans: Prior to SECURE 2.0, Roth accounts in employer retirement plans were subject to RMDs. This differed from Roth IRAs, which are not subject to RMDs. SECURE 2.0 levels the playing field starting in 2024, when neither Roth employer retirement plans nor Roth IRAs will be subject to RMDs going forward.
- Reduction in RMD penalties: Previously, if you failed to take your full RMD, the shortfall was hit with a 50% excise tax. SECURE 2.0 has reduced the penalty to 25%. Furthermore, if the mistake is corrected in a timely manner (as defined by the legislation) the penalty drops to 10%.
- Higher “catch-up” contribution limits: A catch-up contribution is a type of retirement savings contribution that allows people aged 50 or older to make additional contributions to 401(k) accounts and individual retirement accounts (IRAs). Starting in 2025, SECURE 2.0 allows those aged 60 through 63 to contribute an additional amount of at least $10,000 (indexed to inflation) into their workplace retirement plans. More specifically, the additional catch-up amount is the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for those aged 60 through 63 (and again, the increased amounts are indexed for inflation). Starting in 2023, the regular catch-up amount increases to $7,500 – so, if the additional catch-up amount were going into effect next year, it would equate to $11,250 (=$7,500 * 1.5, which is greater than $10,000).
Relatedly, another provision of the SECURE 2.0 stipulates that all catch-up contributions to workplace retirement plans, beginning after December 31, 2023, need to be made to a Roth account in after-tax dollars. An exception, however, is provided for employees with compensation of $145,000 or less (indexed), who can continue to choose whether catch-up contributions are made on a pre-tax or Roth basis (assuming their specific workplace retirement plan permits).
Finally, the current $1,000 catch-up contribution limit that applies to IRAs for people aged 50 and above will be indexed to inflation each year, starting in 2024.
- Employer matching for Roth workplace retirement accounts: Prior to SECURE 2.0, plan sponsors were not allowed to provide employer matching on a Roth (after-tax) basis, as all matching was done solely on a pre-tax basis. Effective on the date of the bill’s enactment, employees will have the option of receiving vested matching contributions on a Roth basis. While earnings on Roth contributions grow tax-free thereafter, one should bear in mind that Roth employer retirement accounts are still subject to RMDs until 2024, as stated earlier.
- Enhancements to qualified charitable distributions (QCDs): Some individuals use qualified charitable distributions (QCDs) to satisfy both their RMD requirements and their philanthropic giving. With a QCD, one can distribute up to $100,000 per year directly to a qualified 501(c)(3) charity after age 70½. This distribution cannot be claimed as a charitable deduction, but it is excluded from taxable income.
SECURE 2.0 now annually indexes the $100,000 limit to keep pace with inflation. Additionally, it permits a one-time QCD transfer of up to $50,000, also adjusted annually for inflation, to a charitable remainder trust or a charitable gift annuity (as opposed to directly to the charity). Both of these changes become effective at the start of 2023.
- Faster 401(k) eligibility for part-time employees: The original SECURE Act passed in 2019 generally requires employers to allow long-term, part-time employees who work at least 500 hours per year for three consecutive years to participate in their 401(k) plans. Under SECURE 2.0, part-time employees need to work at least 500 hours for only two consecutive years to be eligible for their employer’s 401(k) plan. The provision, effective for plan years beginning after December 31, 2024, also extends the long-term part-time coverage rules to 403(b) plans that are subject to ERISA (The Employee Retirement Security Act of 1974).
- Added flexibility to SEP and SIMPLE IRAs: Small businesses and those who are self-employed often take advantage of SIMPLE and SEP retirement accounts, which have contribution ceilings that are far higher than those of other retirement vehicles. The new bill allows SIMPLE and SEP IRAs to accept Roth contributions, effective for taxable years beginning after December 31, 2022.
- Increased annuity/QLAC contributions: A qualified longevity annuity (QLAC) is an investment vehicle that can defer the taxes associated with taking RMDs by converting funds from a retirement account to an annuity, or fixed income stream. The QLAC can defer income inside the IRA to age 85. The bill increases to $200,000 the amount that can be used, without taking a taxable distribution, to purchase a QLAC. The prior limit was 25% of the account up to a maximum of $135,000.
- Elimination of a penalty on partial annuitization: Prior to SECURE 2.0, if a tax-preferred retirement account also held an annuity, the account would need to be bifurcated between the portfolio holding the annuity and the rest of the of the account for purposes of applying RMD rules. This could result in higher minimum distributions than would have been required if the account did not hold an annuity. Effective as of the bill’s date of enactment, the new bill permits the account owner to aggregate distributions from both portions of the account for purposes of determining minimum distributions.
- Removal of RMD barriers for life annuities: SECURE 2.0 eliminates certain barriers to the availability of life annuities in retirement plans or IRA. This was prompted by particular annuity guarantees that previously conflicted with strict RMD tests – for instance, guaranteed annual increases of only 1 or 2 percent, which in turn, did not meet RMD requirements. This provision is effective for calendar years ending after the date of the bill’s enactment.
- Qualified long-term care distributions: The bill permits retirement plans to distribute $2,500 per year to pay long-term care insurance premiums for certain policies, without a 10% early withdrawal penalty (if the account owner is younger than 59 ½). The plan participant would still need to pay income taxes on the distributions. This provision becomes effective 3 years after the date of the bill’s enactment.
- Additional post-death option for surviving spouse beneficiaries: Beginning in 2024, those who inherit a retirement account from a spouse can elect to be treated as the decedent for purposes of RMD rules. This may specifically benefit surviving spouses who inherit retirement accounts from a younger spouse. In this case, the surviving spouse will be able to delay RMDs longer, and once RMDs commence, the amounts will be smaller than if the surviving (older) spouse had elected other post-death options, such as rolling the decedent’s IRA into his/her own.
- “Lost & found” for 401(k) plans: It can be challenging for employers to locate former workers, who may have changed their name or address, to pay out benefits from a retirement plan. It can also be difficult for workers to locate a former employer if that company has rebranded or merged with another firm. To make this easier, SECURE 2.0 requires the Department of Labor to create a national online searchable lost and found database for retirement plans. This provision directs the creation of the database no later than 2 years after the bill’s date of enactment.
To reiterate, this is just a partial list as SECURE 2.0 has over 90 provisions and affects not just retirees/near retirees but those years away from retirement, as well. If you have questions or concerns about how the legislation might affect you personally, please feel free to contact me.
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