Secure Act 2.0 and You
A look at the most important pieces that will have the most impact on your retirement planning
Provided by Beneficent Financial - Home of The Safe Money Lady
On December 29, 2022, President Joe Biden signed the Consolidated Appropriations Act of 2023 into law. The heavily negotiated legislative package includes all appropriations for the federal 2023 fiscal year and the long-awaited SECURE 2.0 Act of 2022. There are 92 loosely related sections in the SECURE 2.0 Act. This article draws on the most applicable and more immediate changes.
Major Changes Made by the Act
Decreases the 50 percent penalty tax for failing to take required minimum distributions (RMDs) to 25 percent, or 10 percent if the failure is corrected in a timely manner.
Allows plans to provide participants with the option of receiving matching contributions on a traditional or Roth basis.
Increases the age for taking RMDs to 73 (for those who turn 72 after 2022), and to 75 (for those who turn 74 after 2032).
Requires that all catch-up contributions in retirement plans be subject to Roth rules, except for employees with compensation of $145,000 or less.
Eliminates RMDs from employer-provided Roth-designated (401(k) and 403(b)) accounts in employer plans, making the rule the same as for Roth IRAs (2024).
Indexes for inflation the current $1,000 catch-up limit on IRA contributions for individuals who have attained age 50.
The act allows a surviving spouse to elect to be treated as the deceased employee for purposes of the RMD rules.
Allows up to $35,000 to be rolled over tax- and penalty-free from a 529 account to a Roth IRA, subject to the Roth IRA annual contribution limits, if the 529 account has been open for more than 15 years and the amount has been in the account for more than five years.
10 Percent Early Withdrawal Exceptions
Adds a permanent exception to the 10 percent penalty tax for distributions before age 59½ for distributions as a result of a federally declared disaster.
Adds a penalty-free distribution exception for individuals who have been told by a physician in the past 84 months that they are terminally ill.
Adds a penalty-free distribution exception for victims of domestic abuse of up to the lesser of $10,000 or 50 percent of their account value.
Adds a penalty-free annual distribution exception for individuals with a financial emergency of up to $1,000, with the option to repay the distribution within three years.
Adds a penalty-free distribution exception to pay up to $2,500 per year for premiums for certain specified long-term care insurance contracts.
Restricts the recontribution period to three years for individuals who received penalty-free distributions from their retirement plans in the case of birth or adoption.
Life Annuities in Retirement Plans
Eliminates the barriers to the availability of life annuities in qualified plans and IRAs that arise under current law, such as the inability to offer guaranteed annual increases of only 1 or 2 percent, return of premium death benefits, and period certain guarantees for participating annuities.
Excludes qualifying longevity annuity contracts (QLACs) from the 25 percent limit, allows up to $200,000 (indexed for inflation) from an account balance to be used to purchase a QLAC, and permits QLACs to offer spousal survival rights.
Directs the Treasury Department to update its regulations to allow “insurance dedicated” exchange-traded funds that could be made available through individual variable annuities.
Provides that tax-preferred retirement accounts that hold an annuity are no longer required to bifurcate the portion of the account holding the annuity and the rest of the account for purposes of applying the RMD rules.
401(k), 403(b), and 457(b) Changes
Allows plan participants in 401(k)s, 403(b)s, and governmental 457(b)s the option of having employer matches subject to Roth rules.
Allows 403(b) plans, which are generally sponsored by charities, educational institutions, and nonprofits, to participate in multiemployer plans and pooled employer plans, similar to qualified plans, including relief from the one-bad-apple rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers.
Provides that, in addition to annuities and mutual funds, 403(b) custodial accounts are allowed to offer collective (group) investment trusts, similar to other tax-preferred savings plans and IRAs.
Allows employees to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal.
Modifies 403(b) hardship distribution rules to conform to the 401(k) hardship distribution rules.
Allows employers that do not sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan), which generally requires that all employees be default enrolled in the plan at a 3 to 15 percent of compensation deferral rate, with a limit on annual deferrals equal to the IRA contribution limit ($6,500 in 2023) and an additional $1,000 (indexed for inflation) in catch-up contributions beginning at age 50.
Expands automatic enrollment in retirement plans requiring new 401(k) and 403(b) plans to automatically enroll employees in plans once they become eligible to participate at no less than 3 percent and no more than 10 percent of salary for new plans beginning after 2024. The employee contribution amount is increased by 1 percent every year thereafter (up to 10 percent but not more than 15 percent). Employees can opt out of automatic enrollment. Small businesses with 10 or fewer employees and certain other businesses are exempt.
Increases catch-up contributions for participants aged 60–63 to the greater of $10,000 or 150 percent of the “standard” catch-up amount (e.g., if the “standard” catch-up amount for 2025 was $7,500, it would be $11,250—150 percent of $7,500) for 401(k) and 403(b) plans.
Changes the three years of 500 hours of service part-time employee rule for 401(k) plans to two years.
The SECURE 2.0 Act expands the opportunities to save additional amounts for retirement, corrects inconsistencies between retirement plans that have existed for years, and eases the rules for participants to access the funds in their retirement accounts. To discuss how these changes could impact your retirement plan, click “Schedule an Appointment” and let’s talk.
This material was prepared by the FPA, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations:
1 - Senate.gov
2 - Kiplinger.com
