SECURE Act 2.0 – Key Provisions and How They Affect Retirement

The SECURE Act 2.0 is now law. In December 2022, Congress passed and President Biden signed this sweeping legislation that effectively overhauls much of the retirement landscape in America. The bill’s key provisions are centered around required minimum distributions, when they must be taken, and some changes to workplace retirement plans and retirement accounts.

On top of RMD changes, SECURE Act 2.0 also contains a great many changes to Roth savings accounts and how they can be used. The Roth rules have been expanded in an effort to increase current tax revenue, as Roth accounts are always funded with after-tax contributions.

Here, we will examine the key provisions of SECURE Act 2.0 and how they might affect retirement for you as well as your loved ones.

RMD Changes

Starting in 2023, the age at which required minimum distributions must be taken has been raised from 72 to 73 years old. This allows retirees who aren’t currently subject to RMDs to wait for another year to begin taking distributions. Anyone now subject to RMDs under the old age 70.5 or age 72 rules must continue to follow the RMD schedule that applies to their respective situation.

While those who aren’t subject to RMDs now can wait longer, the distributions that they take a year later will most likely be slightly larger because of the extra year of growth in their portfolios. Of course, this assumes that the portfolios will have grown over that time.

The bill also pushes the RMD age back to 75 starting in 2033. Time will tell whether this provision is still in force by then.

Annuity Payouts

Another key change revolves around annuity payments taken from a qualified retirement savings plan. Until now, many annuity payouts from defined-contribution plans, such as a 401(k) plan, weren’t enough to satisfy the RMD rules.

Under SECURE Act 2.0, however, annuity payouts can now be used as long as they increase on an annual basis by a constant percentage each year. In past years, an annuity payout that increased by one or two percent per year may have run aground of the RMD rules. But now, as long as the annuity payment is increasing by the same percentage each year (up to 5%, but no higher), the annuity payout will be allowed.

This provision can make the use of annuities inside qualified defined-contribution plans more attractive due to the growing number of investment products used in these plans that aren’t RMD-friendly.

RMDs Removed from Roth Plans

Another major provision contained in SECURE Act 2.0 now removes RMDs from Roth defined-contribution plans.

Until this point, Roth 401(k), 403(b), and 457(b) plans came with RMDs. Only Roth IRAs were exempt from this requirement.

But RMDs are no longer required from these plans starting in 2024. It can make things easier for retirees who are currently forced to take withdrawals from their Roth workplace retirement plans, whether they want to or not.

This provision can also help those who haven’t reached age 73 yet. They now have the option to leave their money in their Roth plan without having to worry about future RMDs. The new rule may ultimately help employers retain more assets inside their plans.

Up until now, anyone who wanted to avoid taking RMDs had to move their money from their Roth workplace plan over into a Roth IRA. But this will no longer be necessary.

Smaller RMDs for Partial Annuitization

If you have some money inside your workplace qualified plan in an annuity, then you will no longer have to take RMDs from both your annuity and your remaining plan balance. This would effectively result in a larger RMD in most cases.

The new provision has eliminated this combination of RMDs. Now, you can take just one RMD based on both account values.

Reduced RMD Penalty

Congress has also drastically reduced the penalties that used to apply when retirees didn’t take their RMDs in a given year. Under the old rule, RMDs that weren’t taken on time would result in a whopping 50% penalty on the undistributed amount from the account or plan.

This penalty has been reduced to 25%. It’s further reduced to 10% for those who take corrective distributions in a timely manner.

More Early Distribution Exceptions

The new bill introduced several more ways that IRA and qualified plan holders can withdraw money without having to pay the 10% early withdrawal penalty. The new exceptions include:

• Terminal illness – Effective in 2023
• Federally-declared disaster losses – Up to $22,000 and effective going back to 1/26/2021
• Pension-linked emergency savings accounts – Up to $2,500 starting in 2024
• Domestic abuse – Up to $10,000 starting in 2024
• Financial emergencies – Up to $1,000 starting in 2024
• Long-term care – Up to $2,500 starting three years from the date the bill is signed

Roth Matching Contributions

The new bill passed by Congress finally allows employers to start making matching contributions in Roth form. This allows employees to accumulate more tax-free money than ever before.

Before this bill was passed, all matching contributions into Roth qualified plans had to be made with traditional contributions. As a result, people were left with plan balances that were partly tax-free and partly tax-deferred. Now, employees can accumulate tax-free money on their entire plan balances and not just their own elective deferrals.

An example of how this new bill works is with the Thrift Savings Plan, the defined-contribution plan for employees of the federal government. The TSP matches the first five percent of employee contributions into the plan, regardless of whether the contributions were made in the traditional or Roth accounts.

So, a TSP participant making $100,000 who contributes 10% of their pay into the Roth plan would get an additional matching contribution of 5% of traditional TSP money. This means that about a third of the employee’s plan balance would be taxable upon withdrawal with the rest being tax-free. Employees will be able to take after-tax matching contributions once the TSP adopts the new plan rules (which will, of course, take some time).

It should also be noted that SEP and SIMPLE plans can now be funded with Roth contributions. This applies to both employee and employer deferrals (contributions).

Catch-Up Contributions Increased

The SECURE Act 2.0 has raised the level of “catch-up” contributions in IRAs and qualified plans starting in 2025.

Those who are ages 60-63 and participate in qualified plans will be able to contribute an additional $10,000 each year into their plans starting in 2025. That amount will be indexed for inflation in subsequent years.

Furthermore, the annual catch-up contribution of $1,000 per year for IRAs will be indexed for inflation starting in 2025. 

Qualified Charitable Distributions (QCDs)

Starting in 2023, retirees who must take RMDs will be allowed a single distribution of up to $50,000 to be used to fund a charitable remainder unitrust, annuity trust, or gift annuity.

This provision amounts to a material expansion of the types of organizations that donors can gift to. This provision also counts toward RMDs. Donors can still take another $50,000 distribution and send it directly to the charity of their choice for a maximum QCD of $100,000.

Saving for Emergencies

Starting in 2024, employees will be allowed to make additional contributions to their Roth savings plans that can be accessed at any time (up to four times a year) without tax or penalty. The limit on this type of contribution is $2,500 (or less if the employer specifies).

There could also be discretionary matching contributions by the employer, which may encourage employees to save more money for emergencies.

Student Loan Debt

This provision affects all employees who are still making student loan payments. Under this provision, employers could start making matching contributions to a retirement plan or account based on the employee’s student loan payments.

For example, if an employee is paying $500 per month to student loans, their employer would deposit that same amount into a qualified plan or IRA. This plan can greatly reduce the dilemma of middle-aged employees who are trying to save for retirement but are still paying off school loans.

529 Plan Rollovers

If a student or former student has had a 529 plan open for at least 15 years, then they can roll the remaining plan balance into a Roth IRA within the annual contribution limits. For example, a 30-year-old who has finished school but still has money left in their 529 plan could roll over $6,500 of it to a Roth IRA in 2023.

The student can’t roll over more than an aggregate of $35,000. But this provision can benefit those with balances left in their 529 plans that they can’t transfer elsewhere.

Revised QLAC Limits

Qualified longevity annuity contracts got a boost under the new legislation as their contribution limits were raised substantially. Before 2023, retirees could only move up to $125,000 or 25% of their total IRA balances (whichever was less) into one of these vehicles.

The new law raises the limit to $200,000 and does away with the 25% limitation. This effectively allows IRA owners to take smaller RMDs for several years and fund more guaranteed income in their retirement savings accounts.

Many QLACs don’t start paying until age 80 or even 85 in some cases. Retirees can take smaller RMDs because these contracts don’t count as money in an IRA or qualified plan until they start paying out.

Automatic Enrollment and Portable Plans

Starting in 2025, employers who offer new 401(k) or 403(b) plans must automatically enroll new employees and then allow them to take the plans with them easily and quickly when they leave. This move is designed to help certain employees to accumulate some retirement savings while they are still working.

Need Help with Your Retirement Planning?

The SECURE Act 2.0 brings many changes to retirement in the United States. Your plans for retirement saving, withdrawals, taxes, and more can be affected, not to mention other areas of retirement planning. Even you are already in retirement, you might be looking at some changes to your overall financial picture.

Need help with making pivots in your retirement planning, or want a second opinion of your existing plan? An experienced and independent financial professional from SafeMoney.com can help guide you.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and financial situation. Should you want a personal referral, please call us at 877.476.9723.