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SECURE 2.0 - Key Provisions for Individuals

| December 27, 2022

While you were busy putting presents under the tree, Congress was busy putting the finishing touches on the “Omnibus Spending Bill,” which included major new retirement legislation called the SECURE 2.0 Act of 2022. Originally a standalone bill that has been in the works for many months, it was lumped into this massive new piece of legislation. Despite being buried in the 4000+ pages, it has already garnered much attention, and you may have already read an article or two about it. Knowing that this Act is long, complicated, and consequential, we want to take this opportunity to look at some of the key provisions and the potential implications of each. If you’re wondering why “2.0” is included in the name, it’s because this is a follow-on the SECURE Act (Setting Every Community Up for Retirement Enhancement) that was passed in 2019 and took effect on January 1, 2020. Some of the new provisions build on what was in “1.0,” while others are completely new. Some will take effect immediately, while others are years out (with most starting in 2024). As we go through each provision, we’ll note its effective date.

Please note that any reference to a 401(k) account in this piece also refers to a 403(b), unless otherwise noted (one effort of the SECURE 2.0 Act was to better harmonize the features of 403(b) plans with 401(k) plans, with some minor exceptions). References to “workplace” retirement accounts generally refer to 401(k) and 403(b) accounts. While SIMPLE and SEP-IRAs are also workplace accounts, the rules for these are so distinct from the others, that we will refer to them directly whenever mentioned.

The RMD age is increasing

Effective: 2023

Currently, required minimum distributions (RMD) begin at age 72. As of 2023, this will increase to age 73. In 2033, it will increase again, this time to age 75. There is no change for those who turned 72 in 2022 or earlier.

Potential implication:

This will increase flexibility to delay distributions and invest in a tax-preferred account longer than is currently permitted. This may be beneficial for some investors/retirees. At the same time, not all retirement savers will benefit from this change. The delayed start date will consolidate RMDs into a shorter timeframe, potentially increasing the total tax bill applied to the distribution over the investor’s lifetime. As is currently the case, you can take an IRA distribution in any amount and at any time after you reach age 59-1/2 – and we encourage you to work with us and your tax professional to carefully plan your retirement income, including distributions from your IRA/401(k), to help meet your needs while minimizing your tax burden and optimizing your estate plan.

Roth accounts get a big boost

If you didn’t know any better, you might think a better name for SECURE 2.0 is “Roth Account Enhancement Act.” Here is a quick rundown of ways that Roth accounts are getting much love in this new legislation. Even if you don’t currently utilize a Roth, you will want to read this section – as you may soon be forced to use one.

RMDs no longer apply to Roth 401(k) accounts

Effective: 2024

Potential implication: While RMDs have never applied to Roth IRAs, those who left their Roth assets in their 401(k) accounts were left contending with RMDs (typically at age 72, with one exception). While they could roll these assets to a Roth IRA to avoid these required distributions, doing so was sometimes tricky due to the “5-year rule” that applies to Roth accounts. This potential inconvenience is now a moot point, though you may still want to open and fund a Roth IRA as soon as possible in order to start the 5-year clock and thus provide yourself with maximum flexibility as to where you house and manage your Roth retirement assets.

Catch-up contributions to a workplace account will have to be done on a Roth basis, with one exception (those earning <$145,000 (Indexed to inflation) can elect pre-tax treatment of these contributions).

Effective: 2024

Potential implication: Many savers who are in a position to fully fund their 401(k), including catch-up contributions, are higher earners who benefit substantially from the tax deduction afforded to “traditional” (pre-tax) contributions. This change to requiring catch-up contributions to be on an after-tax basis will reduce the immediate tax benefit of these contributions. However, this will help diversify the tax exposure of the investor’s retirement assets, which may prove beneficial over the long-term. As before, this forced usage of Roth accounts may mean it is wise for you to open a Roth IRA as soon as possible in order to start the 5-year clock and thus provide yourself with maximum flexibility as to where you house and manage your Roth retirement assets.

Employees can elect to have their employer contributions (matching, safe harbor, and/or profit sharing) be treated as an after-tax contribution.

Effective: 2023

Potential implication: Currently, all employer contributions are treated as pre-tax, regardless of whether the employee has opted for their own contributions to be treated on an after-tax (Roth) basis. Now, you can elect to have your employer contributions also go into a Roth account. You will owe ordinary income taxes on the amount contributed, but this amount (and any future growth attributable to it) will be completely tax-free. As with any considerations of Traditional vs. Roth contributions, you need to assess your own tax planning picture to determine what you believe will be best for you both immediately and over the longer-term. Be mindful that adding these employer contributions to your taxable income may increase your AGI past certain important thresholds, which may have unintended consequences. Carefully consider this with us and your tax professional before electing this new feature.

529 account owners get added flexibility

Effective: 2024

This one could go up in the “Roth accounts get a big boost” section, but we’ll look at it separately, given the very unique nature of this change. Currently, 529 account owners (college savings accounts) often express concern about what to do with excess funds in the account after their child has completed higher education (or didn’t go at all). While there are many great provisions that give the account owner tremendous flexibility with leftover assets, some are still left with being forced to withdraw the excess funds. When they do, taxes and a 10% penalty are due on the earnings in the account. For example, if there is $40,000 left in the account, and $10,000 of this is investment earnings, the account owner will pay ordinary income taxes on the $10,000 and will pay a $1,000 (10%) penalty for taking the money for a non-qualified use.

Under SECURE 2.0, this account owner can now rollover up to $35,000 from this account to a Roth account for the same beneficiary. This has to be done over time, as the rollover counts towards the annual contribution max to the Roth (currently $6,500 in 2023). In addition, the 529 account must have been in place for at least 15-years at the time of the first rollover to the Roth.

Potential implication:

There are still a lot of details to work out with regard to this exciting new provision. However, it’s important that you understand it now, as there are a few key implications. The first is that 15-yr clock. This makes it prudent to open the 529 account early in your child’s (or grandchild’s) life, even if you are just funding it with $100 for the time being (or any amount, for that matter). The important thing is to get the clock started. Secondly, this new provision further reduces the barriers to wanting to segregate your savings into a “college” savings account. Whereas the issue of excess funds has often been a major barrier for many parents, you can now see these accounts as potentially giving your kids a head start on retirement savings (this doesn’t factor in that aiding with college expenses via a 529 is also a great way to help boost retirement savings, as your kids are able to get started sooner with retirement contributions when they aren’t forced to focus on student loan debt). One other key provision is that any funds contributed in the five years prior to the rollover are ineligible for this transfer. There are other details that still need to be hammered out, and we’ll certainly keep you informed as these are made clear.

Speaking of student loans!

Effective: 2024

Starting in 2024, employers will be able to elect to make 401(k) matching contributions based on an employee’s student loan repayments.

Potential implication:

Many younger employees have a difficult time getting started with retirement savings thanks to the overwhelming burden of student loan debt. This presents a double whammy, because they then also forego the benefits of employer matching funds into their 401(k). With this change, employees will be able to collect these matching funds based on their student loan repayments, giving them some early momentum in their retirement savings efforts. As we all know, “time in the market” is the most powerful tool in an investor’s toolkit, and this new provision supports just that. Just one last note – keen-eyed readers will note the word “elect” in the intro. This is key, as employers do not have to adopt this new provision. If you are a business owner looking to attract younger talent, you may want to get a head start on adding this provision to your 401(k) plan as soon as possible. If you are the younger talent, you may want to encourage your employer to make this addition – or consider whether they do as you weigh job offers early in your career.

Making up for lost time

Effective: 2025

Workers ages 60-63 are going to see a big boost in their ability save into workplace retirement accounts, as the annual catch-up contribution limit for these accounts will be boosted to the greater of $10,000 or 50% more than the standard catch-up amount. For example, 150% of the current catch-up limit ($6,500) is $9,750, so the employee would be able to contribute $10,000.

Potential implication:

This will provide a modest boost to retirement savers as they finish up their careers. While it is late in their career, the reality is that many soon-to-be retirees still have a 30+ year time horizon for their investments, so there is still time for these contributions (which could total around $13-15k) to grow and provide further strength to their financial plan. For those able to afford to max out their workplace plan, we generally encourage that they do so. Note that these catch-up contributions will be on an after-tax basis for many savers, as noted above.

Some other minor changes

Let’s look at some other new changes to retirement savings rules. We’ll just take a quick look, as these are either less impactful or apply to fewer individuals. We’ll add the caveat that there are further details to most and we invite your questions if any topic piques your interest:

  • Emergency savings accounts (up to $2,500) are being added to 401(k) accounts, adding additional flexibility and liquidity that should help boost retirement plan participation. This will be allowed for all “non highly compensated employees.” Timeline on this is unclear, but appears to be at least 12 months out (i.e., 2024).
  • The IRA catch-up contribution limit (currently $1,000 annually) will be indexed to inflation starting in 2024.
  • The current “Saver’s Credit” will become a “Saver’s Match.” This is currently a tax credit designed to encourage retirement savings for low- to middle-income taxpayers. In 2027, it will switch from a nonrefundable tax credit to a government-funded match into your retirement account, equal to 50% of your first $2,000 in contributions.
  • Finding and transferring your old workplace accounts is going to get easier. There will be a new national “lost-and-found” for workplace accounts, and Congress has ordered the Treasury Department to issue standardized rollover forms that should help reduce confusion and ease the rollover process. These should be complete within two years.
  • The annual limit for Qualified Charitable Distributions (QCD) will now be indexed to inflation, allowing it to increase beyond its current $100,000/year limit. There is no change to the starting age for QCDs, which is 70-1/2.
  • Part-time workers will find it easier to gain eligibility into their workplace retirement plan starting in 2025. The current “3 years with 500 hours per year of service” minimum requirement will be reduced to just two (2) years. Employers can always opt for lesser requirements.
  • SIMPLE and SEP-IRA contributions can now be treated as Roth (after-tax).
  • There will be increased employer and employee contribution limits for SIMPLE-IRAs starting in 2024.

That’s a lot, and we’ve only touched on the highlights of what amounts to 92 different provisions. For those of you who are business owners and/or benefits professionals, we’re working on a separate piece that looks at the provisions applicable to your sponsorship of a workplace retirement plan. For the rest of you, what we’ve looked at here should address the vast majority of potential implications to your financial plan. As always, we welcome your questions and look forward to taking a deep dive into your financial plan to see how you can leverage these new changes to your benefit.