SECURE ACT 2.0 Creates New Retirement Planning Opportunities

By Lynn Knauf, CPCU, ARM
Jan 10, 2023

On December 29, 2022, the federal omnibus spending bill was signed into law. Notably for the financial services sector, it included legislation collectively referred to as the “Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act.” SECURE 2.0 expands on provisions enacted in 2019 under the original SECURE Act and includes many, far more sweeping, changes affecting retirement planning.

Some SECURE 2.0 changes are effective immediately, while others are phased in over the coming years. Notably, the Act revises the ages at which individuals must begin to take distributions from their retirement plans; eases the significant tax penalties for insufficient or missed distributions; expands opportunities for Roth contributions; adds exceptions to tax penalties for withdrawals from retirement plans; and encourages participation in retirement savings plans. These and other significant SECURE 2.0 changes are highlighted below.

Secure Act 2.0 New Retirement Planning Opportunities

Required Minimum Distributions

The required minimum distribution (RMD) is an IRS-required withdrawal amount from a traditional IRA or an employer-sponsored retirement account each year. It's important to understand when account holders are required to take an RMD, how to avoid potential costly penalties for late distributions, and how to maximize their withdrawal strategy.

  • The original SECURE Act, passed into law in December, 2019, changed the age at which required minimum distributions (RMDs) must begin, from age 70½ to 72.
    • Effective 1/1/2023, SECURE 2.0 increases the age at which RMDs must begin to 73.
    • Effective January 1, 2033, the age at which RMDs must begin further increases to 75; however, the Act does not permit individuals younger than 75 who have already started RMDs by reason of age to stop their distributions.
  • The tax penalty for missed RMDs, or for distributions less than the required minimum, is reduced from 50 percent to 25 percent of the amount by which the minimum required distribution exceeds the actual amount distributed. The penalty is further reduced to 10 percent for corrections made in a timely manner (up to the last date of the second taxable year after the tax is imposed). (Effective for taxable years beginning after enactment.)
  • Required minimum distributions (prior to the account owner’s death) are no longer required on Roth accounts (such as Roth 401(k) accounts) held within an employer’s retirement plan. RMDs required for 2023 but due in 2024 are still required. (Effective for taxable years beginning after December 31, 2023.)

Encouraging Participation in 401(k) and Other Qualified Plans

Like the original SECURE Act, SECURE 2.0 includes a number of provisions designed to boost participation by employees in 401(k) plans and other qualified plans:

  • The Act permits employers to treat qualified student loan repayments as elective deferrals for the purpose of providing matching contributions on 401(k), 403(b) and SIMPLE plans. (Effective for contributions made for plan years beginning after December 31, 2023.)
  • The original SECURE Act made it possible for certain part-time employees to participate in their employer’s 401(k) plan—an employee must have worked at least 1,000 hours in a single year, or have worked at least 500 hours in three consecutive years to participate in the plan. SECURE 2.0 reduces the three-year requirement to two years and extends the provisions relating to long-term part-time employees to 403(b) plans. (Effective for plans years beginning after December 31, 2024.)
  • Employers with no current retirement plans may offer a “starter 401(k) plan” or safe harbor 403(b) plan, requiring all employees to be enrolled with a compensation deferral rate of between 3 to 15 percent. (Effective for plan years beginning after December 31, 2023.)
  • Sole proprietors may retroactively establish 401(k) plans for the prior year up to the deadline for filing a tax return for the current year. (Effective for plan years beginning after enactment.)
  • SIMPLE plans will now have a Roth option and SIMPLE plan participants may contribute on a Roth basis. SEP plans may offer participants the option to treat employer contributions on a Roth basis. (Effective for taxable years beginning after December 31, 2022.)
  • Current law exempts qualified longevity annuity contracts (QLACs) from minimum distribution requirements until QLAC payments begin, but limits the amount that may be invested in a QLAC from an IRA or defined contribution plan. Secure 2.0 repeals the current contribution limit of 25 percent and permits up to $200,000 (indexed) from an existing plan to be invested in a QLAC. The Act also permits QLACs to include spousal survival rights. (Effective upon enactment.)
  • The credit for small business pension plan start-up is increased from 50 percent to 100 percent of administrative costs for employers with up to 50 employees and an additional credit applies based on contributions made on behalf of employees up to a $1,000 per employee cap. The credit is phased out for employers with between 51 and 100 employees. (Effective for taxable years after December 31, 2022.)

Catch-up Contributions

A type of retirement contribution that allows those 50 or older to make additional contributions to their 401(k) and IRAs is called a catch-up contribution. Here are the changes SECURE 2.0 has brought for catch-up contributions.

  • IRA owners age 50 and older are currently permitted to contribute an additional $1,000 (not indexed) each year above the annual stated contribution limit. SECURE 2.0 indexes the IRA catch-up limit. (Effective for taxable years after December 31, 2023.)
  • Individuals age 50 and older are permitted to contribute an amount above the annual stated contribution limit (indexed for inflation) to 401(k), 403(b), 457, and SIMPLE plans. For individuals ages 60 through 63, these catch-up contributions are increased to the greater of $10,000 or 50 percent more than the annual stated amount. (Effective for taxable years beginning after December 31, 2024.)
  • For individuals earning more than $145,000 (indexed), all catch-up contributions to qualified plans are subject to Roth (after-tax) treatment. (Effective for taxable years beginning after December 31, 2023.)

Exceptions to Penalties for Early Distributions or Withdrawals from Qualified Plans

Current law requires a 10 percent penalty tax on distributions from qualified retirement accounts when paid to participants or owners younger than age 59½, subject to certain exceptions. SECURE 2.0 adds additional exceptions, and makes changes to existing exceptions:

  • Withdrawals for emergency personal or family expenses up to $1,000 are now permitted. An optional repayment period of three years applies. Unless repaid, no more than one withdrawal is permitted during the three year repayment period. (Effective for distributions after December 31, 2023.)
  • Withdrawals for victims of domestic abuse are now permitted. Participants may withdraw the lesser of $10,000 (indexed for inflation) or 50 percent of the account amount. Any amounts repaid within 3 years will be tax-free. (Effective for distributions after December 31, 2023.)
  • An exception to the 10 percent early distribution penalty is created for distributions of up to $2,500 per year to pay long-term care insurance premiums. (Effective 3 years after enactment.)
  • An exception to the 10 percent early distribution penalty is created for distributions made to an individual with a terminal illness. (Effective for distributions made after enactment.)

Additional Provisions of the SECURE 2.0

The following are additional provisions financial professionals should know about SECURE 2.0:

  • Up to $35,000 of unused funds in a 529 education account may be rolled over to a Roth IRA. Rollover amounts are included in annual contribution limits and the 529 account must have been open for more than 15 years (Effective with distributions after December 31, 2023.)
  • Employers may enroll employees in pension-linked emergency savings accounts. Employee contributions are capped at $2,500 (or less as determined by the employer). Contributions are after-tax and are considered elective deferrals for purposes of matching contributions. (Effective for plan years beginning after December 31, 2023.)
  • Plan sponsors may provide defined contribution plan participants with the option of receiving matching contributions on a Roth (after-tax) basis. (Effective on the date of enactment.)

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