The SECURE Act 2.0, which is a component of the 1.7 trillion spending bill has been passed by the Senate and the House and is waiting to be signed into law by the President. The SECURE Act 2.0 contains 9 significant modifications or enhancements to retirement that you should be aware of.
- Increase in age for RMDs
According to the current legislation, the RMD age will rise to 73 in 2023 and 75 in 2033. Those who have already begun taking RMDs cannot quit doing so.
- Increase catch-up contribution limits
The age of 50 for catch-up contributions would remain the same.
IRAs – The $1,000 catch-up limit will start being indexed for inflation beginning in 2024.
401(k) & 403(b) Plans – Starting in 2025, the catch-up limit will be the greater of $10,000 or 150% of the catch-up limit for those between 60-63 years of age. Starting in 2026, the catch-up will be indexed for inflation.
- Allow employers to make 401(k) matching contributions based on student loan payments
Allows employers to make a matching contribution even if the employee isn’t saving themselves. The employee would have the decision to use the match to pay a portion of their student loan payments or apply it to their retirement. It’s important to note that employer contributions can be voluntary, and it would be up to the employer to adopt this into their retirement plan.
- 529 Plan to Roth IRA rollovers
Allows rollovers from 529s to Roth IRAs that would be tax and penalty-free with some limitations. A lifetime rollover limit of $35,000, and the beneficiaries have to move the funds from the 529 to a Roth IRA in their name. More than 15 years must have passed after the 529 was first opened.
- Roth 401(k)’s being exempt from RMDs
Roth 401(k)'s currently has RMD requirements, unlike Roth IRAs. This bill would eliminate RMDs for Roth 401(k)’s starting in 2024.
- RMD penalty reduced
The current penalty for not taking an RMD is 50%. This bill will cut that percentage in half to 25%. There is also the opportunity of having the penalty further reduced to 10% if the correction is made in a “timely manner”. It would take effect in 2023.
- Qualified charitable distribution limit increased
The current limit for qualified charitable distributions is $100,000. The change would index the limit by inflation starting in 2023. It will also allow for a one-time gift of $50,000 through a gift annuity or charitable trust.
- Additional Roth changes
SIMPLE and SEP retirement plans participants would have the option for contributions/employer funding to be treated as a Roth beginning in 2023. The current law does not allow these plans to have a designated Roth IRA account.
The bill would also require plan participants of 401(a), 403(b), and 457(b) accounts to make catch-up contributions to a Roth account starting in 2024.
Employers will also have the opportunity to allow employees to elect if they want their matching contributions to go into a Roth account.
- Uniform 401(k) rollover rules
Completing direct rollovers can sometimes be a frustrating process. This rule would standardize the process using sample forms instead of employers having different processes and different paperwork requirements. This change may not be finalized or take effect until 2025.
These 9 changes are by no means everything in the bill related to retirement and tax rules. However, these are some of the things that caught my attention as we navigate retirement planning with our clients.