December of 2022, Congress passed a major spending bill, with seemingly endless changes to retirement account rules. The changes are being dubbed SECURE Act 2.0, a nod to the major changes that were passed in the SECURE Act from December 2019.
Many of the changes in the SECURE Act 2.0 are incredibly detailed and would seem to matter to very few Americans. For perspective, SECURE 1.0 involved about 12 changes. SECURE 2.0 contains roughly 100 changes. Many changes enhance incentives for Americans to save for retirement, which is a good thing. From the perspective of wanting a simpler tax code that the average American can understand . . . well, I’m not sure 100 changes accomplishes that. One final disclaimer before we dig in to some of the major changes: many of the details of SECURE 2.0 are still being interpreted. It’s up to the IRS to interpret Congress’s intent. So it’s difficult to say with certainty how various changes will actually take effect. Further, new legislation does not immediately translate to new processes for financial institutions.
The U.S. financial services industry is dominated by large financial institutions that take time to change forms, processes, and procedures. It’s simply not possible for changes to be implemented within a few days of new legislation being passed. So, for example, if a new type of retirement account is created by Congress to take effect January 1, 2023, there might not be any financial institution that actually offers that type of account for several months. Some institutions may take years, or they may choose not to offer new account types or enhancements that were passed in SECURE Act 2.0. With all of that said, let’s take a look at 12 changes that we feel are more likely to affect American investors.
1. Required minimum distribution (RMD) age changed
The SECURE Act passed in 2019 changed RMD age from 70.5 to 72. SECURE Act 2.0 pushes RMD age to 73, then eventually 75. For those born before 1951, there are no changes. For those born between 1951 and 1959, RMD age will be 73. And for those born in 1960 or later, RMD age will be 75.
2. There will no longer be RMDs for some Roth accounts
Until now, Roth 401(k)s and other qualified Roth accounts (like a Roth 403(b) or Roth 457(b)) required RMDs — unlike Roth IRAs, which did not have RMDs. That is no longer the case. Effective in 2024, designated Roth accounts are more similar to Roth IRAs in that none of them require an RMD.
3. SIMPLE IRAs and SEP IRAs now have a Roth option
We recently wrote about SIMPLE IRAs and SEP IRAs as retirement account options for the self-employed. At that time, SIMPLE IRAs and SEP IRAs did not offer a Roth option. Now, effective in 2023, they do. This is one of those changes that might take some time for financial institutions to implement. Even today, some financial institutions do not offer a Roth option on 401(k)s, which have been around since 2006. Even when financial institutions change their processes to allow it, employers will have to adopt the changes within their plan document.
4. Employers can now make Roth matching and nonelective contributions to employee retirement accounts
Until now, employer matching and nonelective contributions to their employees’ retirement accounts, like a 401(k), were pre-tax. The contributions were not treated as compensation to the employee. Those pre-tax contributions would grow tax-deferred and were taxed when withdrawn. Effective immediately, employees can now choose to have their employers make Roth matching or nonelective contributions to their accounts. Those contributions will be included as income to the employee and will be taxed when received. Employers will continue to get a deduction for contributions made to employee Roth accounts. It’s also worth noting that this does not apply to profit-sharing contributions, only matching or nonelective contributions. This is another change that may take some time for financial institutions to implement and then for employers to adopt.
5. Required “Rothification” for catch-up contributions for high earners over age 50 beginning in 2024
Existing rules permit folks over the age of 50 to make catch-up contributions to various types of retirement accounts. For example, if you are 52 years old and contribute to a 401(k), you can contribute the typical $22,500 as an employee plus a catch-up amount of $7,500. If you make more than $145,000 in wages, the new rule would require that $7,500 contribution to be Roth, not pre-tax. If your employer doesn’t have a Roth option in your retirement plan and you’re over that income limit, you can’t make a catch-up contribution at all — and neither can ANY of the employees in the entire company’s retirement plan, regardless of whether they’re over the income threshold or want to contribute pre-tax! One notable exception — the Rothification rule doesn’t apply to SIMPLE IRAs.
6. 529 college savings accounts can soon be moved to Roth IRAs
Effective in 2024, 529 plan assets can be moved to a Roth IRA. Several details are important here.
- There is a lifetime limit of $35,000 per beneficiary (i.e., student).
- The 529 plan must have been in place for 15 years or longer.
- Contributions to the 529 plan within the last 5 years, plus earnings on those dollars, are not eligible to transfer.
- Dollars must be transferred directly from the 529 plan to the Roth IRA.
- Annual transfer amounts are subject to the annual contribution limits on Roth IRAs, but income limits on Roth contributions do not apply.
What is unclear about this is how states will treat the transaction. In 2018 when the federal government passed legislation allowing 529 accounts to be used for private K–12 education, states had to pass separate legislation to allow for that; otherwise, there could be state tax consequences. Many states, including Nebraska, still do not view that as a qualified expense. That issue is detailed in our most popular blog post ever. So it may take some time for this change to be free of any state tax issues.
7. IRA catch-up limit will be indexed for inflation
The IRA catch-up contribution limit has been $1,000 since 2006. Effective in 2024, that limit will grow with inflation each year, rounded to the nearest $100.
8. 401(k) — and other similar plans like a 403(b) — and SIMPLE IRA catch-up limits will be enhanced
As mentioned in #5, folks aged 50 and older can make catch-up contributions to retirement plans. Effective in 2025, participates who turn age 60, 61, 62, or 63 can make a larger catch-up contribution in that year. The new catch-up limit for 401(k) participants will be the greater of $10,000 or 150% of the standard catch-up limit. For SIMPLE IRAs, the limit is the greater of $5,000 or 150% of the standard catch-up limit. It’s worth noting that once a person turns 64, the catch-up limit will revert to the standard, lower amount. Don’t ask me why!
9. Retirement plans can now be linked to an emergency savings account (ESA)
Effective in 2024, employees can contribute to an ESA within a company’s retirement plan until the ESA’s balance reaches a balance of $2,500. That ESA must be accessible for distributions once a month for any reason, penalty-free.
10. Sole proprietors can establish a Solo 401(k) before the tax filing deadline and make contributions for the prior year
Sole proprietors can establish and contribute to a Solo 401(k) for the previous tax year (beginning with tax year 2023). Previously, sole proprietors needed to establish a Solo 401(k) before December 31.
11. Employers can make larger contributions to SIMPLE IRAs
In the past, employers could only make a flat 2% contribution or a 3% matching contribution to employee accounts. Now, employers can also make contributions up to $5,000 or 10% of an employee’s compensation to each employee.
SIMPLE IRA contribution limits for small businesses are further enhanced. For businesses with 25 or fewer employees, the limits are increased by 10%. For businesses with 26–50 employees, they can receive that bump in contribution limits, too, but only if they increase their match to 4% (from 3%) or make a flat 3% contribution (as opposed to 2%). Real simple, right?
12. Employers who establish new retirement plans might be eligible for larger tax credits
The original SECURE Act provided some tax credits to small employers to help offset the costs of starting a new retirement plan for the business. SECURE Act 2.0 provides a tax credit up to 100% of retirement account startup costs to employers with 50 or fewer employees. Further, and maybe more notably, beginning in 2023, small employers are eligible for a credit to help pay for the cost of actually CONTRIBUTING to the accounts of employees who earn less than $100,000. The credit is capped at $1,000 per employee, and is equal to:
- 100% of contributions in year 1
- 75% in year 2
- 50% in year 3
- 25% in year 4
Employers who have 51–100 employees are eligible for a reduced credit.
Well, there you have it — a summary of SECURE Act 2.0. Or is it? As I mentioned in the introduction, the new legislation introduces more than 100 provisions to retirement plans, and this is only a dozen of them. As time passes, various government entities will need to interpret the law and issue guidance so that we can better understand the rules. Until then, we endeavor to provide our clients with advice that makes sense and boils down the complex rules of investing to what really matters to you. We’re here for you! If you need help, please don’t hesitate to reach out to us.