Key Provisions of the SECURE 2.0 Act for Individuals
by Chad VanDyken
ARTICLE | February 01, 2023
On December 23, 2022, Congress passed the $1.7 trillion omnibus spending bill that contained several accounting and tax-related provisions, including the SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act of 2022. This Act aims to improve retirement savings by making it easier for employers to offer retirement plans to employees and for individuals to increase their retirement savings.
The SECURE 2.0 Act includes a variety of provisions related to required minimum distributions (RMDs), catch-up contributions, Roth contributions, and more. In this article, we will discuss selected provisions of the SECURE 2.0 Act and their potential impact on retirement planning.
Required minimum distributions
The Act changes the age for required minimum distributions (RMDs) from retirement plans from age 72 to age 73 starting January 1, 2023, and then to age 75 in 2033.
The Act also reduces the penalty for failing to make RMDs from 50% to 25% for employer retirement plans and IRAs (or 10% if the omission is corrected within two years for non-employer plan).
Additionally, the Act will remove the RMD requirement for employer-sponsored Roth 401(k) and 403(b) accounts starting in 2024.
The Act increases catch-up contributions to 401(k) plans for older savers. The catch-up contribution limit for those 50 or older will be increased from $6,500 to $7,500 for 2023.
For tax years beginning after December 31, 2024, the catch-up limit will be increased to the greater of $10,000 or 150% of the 2024 annual catch-up limit for those aged 60-63.
Catch-up contributions made after December 31, 2023, will be required to be made as Roth contributions, except for employees earning $145,000 or less.
The Act includes provisions that exempt certain individuals from the 10% early withdrawal penalty tax for distributions from retirement plans. One such exception applies to individuals who are suffering from a terminal illness.
Another exception applies to survivors of domestic abuse, who will be able to withdraw up to $10,000, or 50% of their vested account balance, without facing a penalty. Employers will be able to rely on self-certification from the participant to meet this exception. This type of withdrawal will be treated as taxable, but the individual will have the option to repay the funds over a three-year period. Any taxes paid on the withdrawal will be refunded if the funds are repaid.
Also, under the Act, individuals will be able to withdraw up to $1,000 from their retirement savings each calendar year to pay for personal or family emergency expenses without facing a penalty. However, the funds must be replaced within the next three years before another withdrawal can be made.
The Act also includes special rules for distributions from retirement funds in connection with a qualified federally declared disaster. Under these provisions, individuals will be able to withdraw up to $22,000 from employer plans and IRAs without facing a penalty. The amount taken into gross income can be spread out over three years, and the individual will have the option to repay the funds during that time. Any taxes paid on the withdrawal will be refunded if the funds are repaid. This provision will be retroactive to disasters occurring on or after January 26, 2021.
Families and students are hesitant to fully fund their 529 accounts due to concerns about leftover funds being penalized if they are not used for qualified education expenses.
The Act includes provisions allowing individuals to roll over up to $35,000 from their 529 college savings plan to a Roth IRA tax and penalty-free, provided that the 529 plan has been open for more than 15 years. Beneficiaries must transfer the funds to their own Roth IRA to take advantage of this provision. This provision will take effect for distributions made after December 31, 2023.
Qualified charitable contributions
Qualified charitable distributions (QCD) are a tax-efficient method of satisfying an individual’s required minimum distribution (RMD) from an IRA. The QCD must be a direct transfer from an IRA and can be used to fulfill up to $100,000 of the RMD for the year. The advantage of the QCD is that it is excluded from taxable income, unlike regular withdrawals, which are taxable, even if the funds are later used for charitable donations.
Under the SECURE 2.0 Act, the qualified charitable distribution (QCD) $100,000 limit will be adjusted for inflation after 2023. The Act will also allow for one-time gifts of up to $50,000, indexed for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity.
Emergency savings accounts
Despite the ability of individuals to save on their own, many fail to do so. A report by the Federal Reserve indicates that nearly half of Americans would have difficulty covering an unexpected expense of $400. As a result, many are forced to withdraw from their retirement savings.
In 2024, employers will have the option to offer an emergency savings account through a defined contribution plan for non-highly compensated employees. The account will be linked to the plan, and the employer can enroll employees at a rate of up to 3% of their salary, with a maximum balance of $2,500 (or lesser set by the plan sponsor). Contributions to the account will be made after tax and are eligible for employer matching. Any matching funds must be contributed to the employee’s retirement account, not the emergency savings account. Employers must allow participants to withdraw funds at least once per month.
Keeping emergency savings separate from retirement savings accounts will give employees a clearer understanding that one account is for short-term emergencies and the other is for long-term retirement savings. This will empower them to manage unexpected financial difficulties without compromising their long-term financial security in retirement through emergency withdrawals.
The Act replaces the current Saver’s Credit for contributions to qualified plans with a Saver’s Match program under which taxpayers who make qualified contributions to an eligible IRA or retirement plan and meet income requirements will be eligible for a federal matching contribution up to $2,000. The match is based on 50% of contributions and will not count towards annual contribution limits for the retirement plans. The match is phased out between $41,000 and $71,000 of income for taxpayers filing jointly and between $20,500 and $35,500 for single taxpayers or married filing separately. This provision will take effect for taxable years beginning after December 31, 2026.
Student loan matching
Employees may be unable to save for retirement due to a heavy burden of student debt, resulting in a loss of potential matching contributions for their retirement plans. The Act allows employers to treat student loan repayments as elective deferrals for matching contributions. This means that starting from plan years after December 31, 2023, employees will be able to self-certify and receive matching contributions to their retirement plan for student loan payments made towards qualified higher education expenses. A qualified student loan payment is defined as any debt incurred by the employee solely for the purpose of paying for their own qualified higher education expenses.
Retirement plan database
The Act establishes a database that can be searched online and provides contact information for administrators of plans where a participant or beneficiary may have a benefit. This database will be created within two years of the Act’s implementation. Starting in 2025, sponsors must provide the appropriate information to the Department of Labor to be included in the database.This article provides a brief overview of select provisions of the SECURE 2.0 Act and is not a substitute for speaking with one of our expert advisors. If you would like more information on the SECURE 2.0 Act of 2022, please contact our office.
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Chad VanDyken, CPA, CFP®
Chad VanDyken joined Larson Gross in 2015. He holds a degree from the University of Hawaii at Manoa, where he double majored in Accounting and Finance with a focus on personal financial planning.
In addition to being a CPA, Chad is a Certified Financial Planner (CFP) and has the opportunity to help individuals navigate their personal financial planning and estate tax needs.