SECURE Act 2.0 Key Features

On December 23^rd, 2022, Congress passed the Consolidated Appropriations Act of 2023, which included the SECURE Act 2.0 bill.  SECURE Act 2.0 contains many provisions that could impact your financial plan, so I wanted to give a brief description of the most impactful of those provisions (at least for my clients).

This is not meant to be a comprehensive list of all provisions in the bill or to spell out every detail of the rules discussed but rather to give you enough information to at least know the options made available to you through this massive piece of legislation.

• • RMDs are pushed back…again
    
    • To 73 if you were born between 1950 and 1959
    • To 75 if you were born in 1960 or later
• • No RMDs for plan Roth accounts starting in 2024
    
    • Includes Roth 401k, Roth 403b, Roth 457b, and the Roth component of the Federal Thrift Savings Plan
    • Languange in the bill simply eliminates the RMDs for plan Roth accounts
      
      • Anyone already taking RMDs for these Roth accounts would simply be able to stop beginning in 2024
    • This levels the playing field between Roth IRAs, which did not have RMDs, and the Roth component of employer retirement plans, which did
• • SIMPLE Roth IRAs and SEP Roth IRAs
    
    • Beginning in 2023, individuals can now contribute to SEP and SIMPLE Roth IRAs
      
      • An election to do so would have to be formally made and approved by the IRS, and custodians will have to update procedures and policies
        
        • So, it will take some time to work through the necessary details and red tape, but this is good news for small business owners, especially solo business owners who struggle with the decision between a SEP IRA and a Solo 401k or were simply immediately converting the SEP contributions to a Roth IRA
• • Employer matching and/or nonelective contributions to your Roth 401k are now permitted
    
    • This will take some time to implement as employer plan administrators work through the details, but this would give you the opportunity to receive your matching contributions as Roth dollars instead of pre-tax
      
      • You would have to pay the taxes on these employer contributions when receiving them
      • The contributions would vest immediately, so employers may be reluctant to implement this option
• • Catch-Up Contributions for high wage earners must be Roth beginning in 2024
    
    • The bill defines a high wage earner as an individual with wages above $145,000 in the preceding year from the employer sponsoring the plan
• • 529 plan transfers to Roth IRA beginning in 2024
    
    • There are a number of rules associated with this one, and you will likely want to discuss the details with a knowledgeable CPA or Financial Planner before attempting to execute, but here are the highlights:
      
      • The Roth IRA owner and the beneficiary of the 529 plan must be the same individual
      • The 529 plan from which the transfer to Roth occurs must have been open for at least 15 years
      • Contributions made to the 529 plan in the last five years and the earnings on those particular contributions are NOT eligible to be transferred to a Roth IRA
      • The Roth IRA owner to which the 529 dollars are transferred is still required to have earned income and is limited to the overall Roth IRA annual contribution limit
        
        • For example, assuming the IRA contribution limit in 2024 is still $6,500:
          
          • If the Roth IRA owner is under 50 years of age and contributed $2,000 to his or her IRAs in 2024, only another $4,500 could be transferred to that owner’s Roth IRA from a 529
      • $35,000 is the lifetime maximum dollar amount a beneficiary can transfer to their Roth IRA from a 529 account
      • The language in this provision is a bit confusing, and misinterpretations are inevitable; however, it opens the door for some planning opportunities and maybe a little less stress about overfunding your 529 savings
• • A new Emergency Savings Account that is linked to your company retirement account
    
    • Starting in 2024, a new type of savings account will be created and linked to your company retirement plan
      
      • Only available to non-highly-compensated employees (non-HCEs)…you can find the IRS definition of a Highly Compensated Employee here
      • Contribution limit is $2,500, but your employer can impose a lower limit
      • The balance must be held in cash or cash equivalent investments
      • The plan must allow at least one distribution per month and must not impose a fee on the first four distributions per year
      • Employers must match on contributions just as if you were saving to the retirement plan
      • Employers can auto enroll employees up to 3%
• • A number of new exceptions for avoiding the 10% penalty on withdrawals from retirement accounts prior to age 59 ½
    
    • Most notably, starting in 2024, the bill creates an exception for penalty-free distributions for “emergency expenses” (very broadly defined), limited to one withdrawal per calendar year and capped at $1,000
      
      • Additional rules for subsequent withdrawals:
        
        • You must repay the prior distribution,
        • The total of your regular contributions made after the emergency withdrawal must exceed the amount of the withdrawal, or
        • Three years must pass before your next emergency distribution
• • Some other provisions of the bill that may be of interest to you:
    
    • Indexing IRA catch-up contributions for inflation starting in 2024
    • Increased catch-up contributions to your company retirement account if you are between ages 60 and 63 starting in 2024
    • Qualified Charitable Distributions (QCDs) will be indexed for inflation beginning in 2024
      
      • The limit has been fixed at $100k since inception in 2006
    • Removing some of the restrictions around Substantially Equal Periodic Payments (SEPPs) (also known as 72(t) payments) starting in 2024
    • Starting in 2023, the RMD shortfall penalty is reduced from 50% to 25% and then to 10% if corrected within the “Correction Window”

There are many other provisions in the bill, and while those other provisions may apply to you, these are the ones that stand out most to the folks I work with.  You can view the entire bill here…starting on page 2000.

Financial planning is an ever-evolving endeavor.  Make sure you know the rules.