The final version of the SECURE 2.0 Act of 2022 has passed. Here’s what that means for your retirement account.
Saving for retirement should be changing for the better, thanks to the passage of the law formerly known as H.R.2954, or Securing a Strong Retirement Act of 2022. Now officially referred to as the SECURE 2.0 Act of 2022, the law was drafted as a follow-up to 2019’s Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, and passed as part of an omnibus bill in December 2022.
What it’s meant to do is expand coverage and increase retirement savings. How? In many different ways — but one of the biggest has to do with RMDs.
An RMD Refresher
An RMD is a required minimum distribution: the amount you must withdraw from your IRA once you reach a certain age. They’re designed so that the account will eventually run out of funds instead of racking up accumulations forever, and they’re also there so that the IRS gets its share of the savings. Money put into a retirement account is not taxed, but the money taken out of a retirement account can be, depending on the situation.
Under the previous law, if you skip taking your annual RMD in full (unless you’ve got what the IRS considers “a reasonable cause”), the shortfall is hit with an intimidating 50 percent excise tax.
However, under SECURE 2.0, this will be reduced to 25 percent. If the shortfall is corrected in a timely manner, the penalty is further reduced to 10 percent.
And the rules for when RMDs become necessary are changing, too. Starting on January 1, 2023, the age to begin taking RMDs initially increases to 73, then rises to age 74 on January 1, 2030, and up to 75 on January 1, 2033.
But RMDs aren’t the only thing that SECURE 2.0 will change.
Catch-up Contribution Changes
Once you turn 50, you’re allowed to chip a little extra into your IRA, up to $1,000 a year. If you do, you get a tax break for that contribution, which is nice, but additionally, the payout at the end can add up more than you might expect. For an IRA yielding 4 percent annually, an additional $1,000 contribution per year starting at age 50 will compound to about $22,000 when you’re 65, and an 8 percent annual return adds up to about $30,000 extra for retirement.
SECURE 2.0 allows those catch-up contributions for anyone over 50 to be indexed for inflation rather than being capped at $1,000 and allows for even higher catch-up contributions for those aged 60 through 63. Now that the law has passed, people of those three ages will be able to make catch-up contributions up to $10,000 or 150% of the regular catchup limit in 2024 for years in which the participant would attain age 60 through 63 ($5,000 or 150% of 2025 limit for SIMPLE plans).
Effective for years beginning after December 31, 2023, any catch-up contributions to qualified plans are subject to Roth tax treatment except for those employees with compensation of $145,000 or less (indexed). This means you’ll pay taxes on withdrawals when the time comes.
Helping the Hurting
SECURE 2.0 should also give some comfort to victims of domestic abuse. Withdrawing money from IRAs and 401(k)s before age 59½ usually comes with a 10 percent penalty (on top of regular income tax). But SECURE 2.0 waives that penalty on up to $10,000 or 50 percent of the account balance, whichever is less, for people who can certify that they have experienced domestic abuse. Not only is the penalty waived, but the income tax on these distributions doesn’t have to be paid all at once. Instead, the tax payments can be spread over three years. And any amount put back into the retirement account within that three-year time span wouldn’t be taxed at all but would instead be treated as a rollover. This provision begins in 2024.
What Else Is New?
In addition to the changes to IRAs, the new law expands automatic enrollment in 401(k)s and related 403(b) and SIMPLE plans, and, for employers, boosts the startup credit, making it easier for small companies to sponsor retirement accounts. That means there are going to be a lot more employees with retirement accounts: They’ll be signed up automatically with a right to opt out rather than having to expend effort to sign up in the first place. All new 401(k) and 403(b) plans adopted after 12/29/22 -- except businesses with fewer than 10 employees, new businesses less than 3 years old, and churches and governments -- must (beginning 1/1/25) automatically enroll participants at 3%-10% and increase the rate by one percent per year to at least 10%, but no more than 15%.
If you’re one of the new breed of ultra-mobile employees who change jobs every few years, then you know that tracking retirement plans can be a real headache for both you (who eventually will want your retirement money) and your past employers (who want to pay out benefits). The new law eases that pain by providing for “auto-portability.” It instructs the Department of Labor to create a national lost-and-found database to match employees with their retirement plans online.
SECURE 2.0 could change several other things, too. As it stands, thanks to this law’s passage as part of the omnibus appropriations bill last December, you should have more options for putting your IRA to work for you.
CONTACT one of our advisors for more information.
Sources:
https://www.napa-net.org/news-info/daily-news/breaking-news-final-secure-20-included-year-end-spending-bill / https://www.napa-net.org/sites/napa-net.org/files/SECURE%202.0%20Reference%20Guide_GPS_122622.pdf
https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/255925/SECURE-20-in-2023-and-beyond
https://www.asppa.org/news/key-secure-20-act-provisions-and-effective-dates
https://www.ntsa-net.org/news-resources/look-secure-and-more
General background, automatic enrollment, database, etc:
https://www.kiplinger.com/retirement/retirement-plans/602821/secure-act-2
How RMDs work:
https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp
Catch-up contribution example math:
https://retirementplanadvisors.com/news/what-are-catch-up-contributions-really-worth/
Catch-up contribution indexing up to $10,000:
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