SECURE 2.0 – What it is and how it affects you

SECURE 2.0 was signed into law by President Joe Biden on Friday, December 29, 2022. While the changes in Secure 2.0 are not as drastic as those in the original SECURE Act from 2019, there are several items that will affect retirees. Most of the provisions, however, impact workers and employer plans. Secure 2.0 includes more than 90 provisions, and we have summarized some of the key points below:

Individuals In or Nearing Retirement

RMD Changes

In 2019, SECURE Act 1.0 increased the required minimum distribution age from 70 ½ to age 72. SECURE 2.0 continues to delay the required minimum distribution age. As of January 1, 2023, the required minimum distribution age has been increased to 73. Individuals who turned 72 in 2022 will still be required to take RMDs this year. Starting in 2033, this age will increase to 75.

Determining RMD amounts and when they are required to be taken can be tricky. Until 2023, the penalty for a missed RMD was 50%. Starting in 2023, if a RMD is improperly withdrawn, or not withdrawn, the penalty is reduced from 50% to 25%. Furthermore, if the RMD is corrected in a timely manner, the penalty is only 10%.

Effective January 1, 2024, RMDs will not be required for employer retirement accounts with a Roth designation.

Catch-up Contributions

Currently, individuals age 50 and over contributing to an IRA, are eligible for a catch-up contribution of up to $1,000 (bringing the maximum annual contribution to $7,500). SECURE 2.0 will increase contributions limits to these individuals. Effective in 2024, the $1,000 catch-up contribution limit will be indexed to inflation, adjusted annually.

Also beginning in 2024, if an employee’s prior year income exceeds $145,000 (inflation indexed), catch-up contributions for the current year must be made into a Roth designated account if contributing to a retirement account (not IRA). Beginning in 2025, individuals age 60 through 63 inclusive, are eligible for a larger catch-up contribution. This larger catch-up contribution is the greater of 150% of regular catch-up contribution limits, or $10,000. The current catch-up amount for those over 50 is $7,500.

QCDs

Qualified Charitable Distributions are donations made directly from a retirement account to a qualifying charitable entity. Typically, distributions from retirement accounts are subject to income taxes and RMD requirements. However, QCDs count towards the RMD amount and are tax neutral (You do not include the RMD in income, but you do not get a deduction for the charitable contribution). SECURE 2.0 expands distributions beginning in tax year 2023. The provision will now “allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts”¹. This will allow for additional tax-advantaged gifts from retirement accounts.

Individuals Far From Retirement

Simple and SEP Contributions

Currently, only traditional pre-tax contributions can be made to Simple and SEP IRAs. Starting in 2024, SIMPLE and SEP IRAs will allow Roth contributions. Both the contributions from the employee and the matching contribution may be designated Roth.

Emergency Savings Account

Beginning in 2024, qualified employers can begin offering emergency savings accounts with a Roth designation to employees. Employers may auto-enroll employees and deduct up to 3% from each paycheck as a contribution. Additionally, employers may make matching contributions. These savings accounts have a limit of $2,500 with any excess contributions rolling into a retirement plan. Individuals may make withdrawals tax and penalty free if certain stipulations are met.

Student Loan Employer Contributions

Starting in 2024, employees who make student loan debt repayments are eligible to receive an employer “match”. These employer contributions will be deposited directly into the employee’s retirement savings account.

529 Plan Rollovers

As tuition and educational expenses continue to rise, 529 plans are one of the best ways to save for college. SECURE 2.0 allows 529 account owners to roll unneeded assets, up to $35,000, into a Roth IRA for the beneficiary. The 529 account must have been open for at least 15 years to be eligible to roll. 529 to Roth IRA rollovers are, however, subject to Roth IRA annual contribution restrictions.

Retirement Plan Auto-enrollment

By 2025, employees of companies with newly established retirement plans will be automatically enrolled. A 90-day window will be given to un-enroll. Contributions to these retirement plans will be automatically deducted from the employee’s paycheck. During the first year that a company implements this auto-enrollment retirement plan provision, employers may deduct and contribute between 3-10% of each employee’s paycheck. This contribution will increase annually by 1% until 10-15% of each employee’s paycheck is withheld for retirement plan contributions.

401(k) Roth Matching

Employers can now make matching Roth contributions into 401k retirement accounts. Since Roth contributions are made on an after-tax basis, the employee will have to pay tax on the match amount.

Provisions Timeline

2023

Required minimum distribution age increases to 73 (up from 72)
“As a part of the QCD limit, one time gifts up to $50,000 (inflation adjusted) can be made to a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity”²
SIMPLE and SEP plans now allow Roth contributions

2024

RMDs from Roth accounts in employer retirement plans are no longer required
The $1,000 catch-up contribution into IRAs for individuals age 50+ will now be indexed to inflation
Creation of an emergency savings account (up to $2,500) with Roth designation. Withdraws will be both income tax and penalty free.
Employers can “match” student loan debt repayments with a retirement contribution into a retirement account
High income individuals age 50+ who elect to make catch-up contributions must do so into a Roth account

2025

Individuals age 60 to 63, will be eligible to make catch-up contributions of at least $10,000 per year (indexed to inflation) to retirement plans.
Auto-enrollment into retirement plans for certain employees begins. Contributions are withheld from each paycheck. Contribution amounts increase each year until certain limits are reached (begins at 3% and increases to between 10% and 15% at a rate of 1% per year).

2027

A government match paid directly into retirement accounts will replace the Saver’s Credit

2033

Required minimum distribution age increases to 75 (up from 73)

Article by Nathan Hethcox, Analyst at NBZ Investment Advisors, LLC
Updated 2/15/2023

References

Disclosures

The opinions expressed are those of NBZ Investment Advisors, LLC (“NBZ”). The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.

This information should not be considered a recommendation to purchase or sell any particular security. Investing involves risk including the potential loss of principal. Additionally, this material should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.

NBZ is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about NBZ’s investment advisory services can be found in its Form ADV Part 2, which is available at nbzinvest.com or by calling (865) 584-1184. NBZ-23-02