SECURE 2.0 Passes - What could this mean for you?

SECURE 2.0 Passes - What could this mean for you?

February 07, 2023

In the final days of 2022, Congress passed a new set of retirement rules designed to facilitate contribution to retirement plans, and access to those funds earmarked for retirement.

The law is called SECURE 2.0, and it is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019. 

Before getting into some of the highlights, it's worth noting that many of the affected agencies and institutions haven't yet fully digested all the new provisions. Some of the law's wording still needs to be interpreted, and in some cases, financial institutions and plan managers may have even printed, and sent, year-end documentation reflecting the rules that existed before the law was passed. So, be careful when reviewing any material about the rules governing topics such as RMDs and retirement savings. It may take some time for all the changes in SECURE 2.0 to be fully applied.

The new legislation has dozens of significant provisions; here's how these changes could affect those saving for retirement, as well as those already in retirement.


New Required Minimum Distribution Rules

Required minimum distribution (RMD) age will rise to 73 years in 2023. One of the most critical changes was increasing the age at which owners of retirement accounts must begin taking RMDs. Further, starting in 2033, RMDs begin at age 75. If you had already turned 72 in the year 2022 and took your first RMD, you must continue taking distributions. 

Note: If you turned 72 in 2022, you won't get a break under SECURE 2.0, based on our current understanding of the law. If you haven't taken your first RMD yet, you will still have to do so by April 1 of this year. As noted, you will also have to take your 2023 distribution within the calendar year.

Reduced penalty. Starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25 percent from 50 percent. If you promptly fix the mistake, the penalty may drop to 10 percent.

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth IRA rules. From 2024, the legislation no longer requires minimum distributions from Roth accounts in employer retirement plans.


What could this mean for you?

Being able to delay RMDs could allow you to keep more of your tax-deferred savings invested for longer, potentially benefiting some savers. However, investors with significant tax-deferred savings could face a tradeoff.

In short, leaving more of your tax-deferred savings until you're older could leave you pressed with even larger distributions when your RMDs finally start. That could drive up your overall tax burden and potentially push you into a higher tax bracket.

We encourage retirees to work with a financial planner or advisor to create a plan to manage their income and taxes according to their needs and savings.


New Catch-up Contribution Rules

Catch-up contributions. From January 1, 2025, investors aged 60 through 63 years can make annual catch-up contributions to workplace retirement plans of up to 150% of the regular catch-up amount for each given year, or $10,000 -- whichever is greater. The catch-up amount for people aged 50 and older in 2023 is $7,500.

Catch-up hedged for inflation. Starting in January of 2024 all contribution limits and catch-up limits will be indexed for inflation. This includes retirement plans and IRA catch-up and contributions limits.

Note: There is a catch.  Also starting in 2024, if your annual earnings are more than $145,000, all your catch-up contributions will need to be made to a Roth account, using after-tax dollars.


What could this mean for you?

Older workers, particularly those who may be behind on their retirement savings, can make even more use of their tax-advantaged retirement accounts. Combined with the extended RMD schedule, investors will have more time to boost their savings.

The Roth requirement for higher earners could result in some individuals paying higher up-front tax rates when making catch-up contributions in their working years than they might have faced withdrawing those funds from a tax-deferred account in retirement (assuming their tax rate in their working years is higher than what they expect to pay in retirement). This makes meeting with a financial planner or Telos advisor more important than ever to ensure that contributions and distributions are made in the most tax-efficient manner possible.


Revised Roth Rules

Employer Roth match. Workers are allowed to receive matching contributions to qualified retirement plans on an after-tax basis, if available. In the past, only pre-tax matching contributions were allowed.

SIMPLE and SEP. Beginning in the year 2023 and onward, employers can make Roth contributions to savings incentive match plans for employees (SIMPLE) or simplified employee pension (SEP). This was also not allowed previously.

529 to a Roth. Starting in 2024, individuals can roll a 529 education savings plan into a Roth individual retirement account (IRA) for their beneficiary. If your child receives a scholarship, goes to a less expensive school, or does not go to school, the money can get repositioned into a retirement account. Be mindful that there are extra rules created around these rollovers. A 529 plan has to be open for a minimum of 15 years and the last 5 years of contributions aren't eligible for rollovers. You may wish to check with your tax professional, financial planner or Telos advisor on these rules.


What could this mean for you?

These provisions potentially bring more funds into an after-tax portion of retirement plans. For those who believe they'll be in higher tax brackets in retirement then they are now, this may be a benefit. 

However, these employer plan provisions are dependent on employers adding these features to their business retirement plans to benefit their employees and could take time and be costly for employers to make these changes.


Access to Emergency Funds

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, 2024 onward, an employee can take up to $1,000 from a retirement account for personal or family emergencies.

Emergency provisions expanded. The terminal illnesses distribution definition has been expanded to 84 months terminal from the previous 24 months definition, and a new survivors of domestic abuse exception for qualified withdrawals was created. This change allows survivors to be able to withdraw up to $10,000 or 50% of their vested balance within 1 year of a domestic violence event.


What could this mean for you?

SECURE 2.0 also allows workers to self-attest that they meet IRS hardship criteria for the purposes of hardship withdrawals. Where previously workers had to provide documentation of their hardship to claim a hardship withdrawal. Now they can simply self-attest. 

Issues may arise with the 'access to funds provision', now that plan sponsors are not required to verify that the amount was spent on an emergency. Some participants might withdraw for items that others may not consider a true emergency.


New Retirement Plan Rules for Employers

Automatic enrollment. In 2025, the Act requires employers to automatically enroll employees into workplace plans and increase contributions each year. However, employees can choose to opt-out and this rule will not apply to current plans only new retirement plans.

New 401k Retro Deferral. Sole Proprietors who establish new plans can make retroactive salary deferrals for the prior year. Deferrals must be made by filing deadline the following year (not including extensions).

Support for small businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100 percent from 50 percent for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.


What could this mean for you?

Auto enrollment could lead to higher retirement savings and better financial outcomes for workers. Auto-enrollment benefits employers as well, by increasing plan participation and lower financial stress in employees. Sole proprietors will be able to defer income from previous years when creating new retirement plans.

When starting a new job or changing jobs be aware of the auto-enrollment rules and how they may affect your paycheck and taxes going forward.


Other Highlights

Student loan matching. In the year 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.

Qualified charitable donations (QCDs). 2023 onward, QCDs will adjust for inflation. The limit applies on an individual basis; therefore, for a married couple, each person who is 70½ years and older can make a QCD as long as it remains under the limit.


Bottom line

SECURE 2.0 changes many of the rules governing how we save and pay for retirement. Some of the provisions won't take effect for another year or two, but it's still important to consider how they might affect your saving and spending plans today. One might see this as an opportunity to meet with a financial planner or Telos advisor who can help review your current strategy and discuss whether any changes are appropriate.

The change in retirement rules does not necessarily mean adjusting your current strategy is warranted. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changes to another. Moreover, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It is not intended as a substitute for one-on-one personalized advice. If changes are appropriate, your trusted financial planner or Telos advisor can outline an approach and work with your tax and legal professionals, if applicable. Please contact us with any questions you may have today or to setup a one-on-one personalized meeting.