The SECURE Act 2.0 for individuals was signed into law on December 29, 2022. It covers numerous changes to retirement provisions which are intended to increase retirement savings; facilitate access to retirement savings; provide employees the opportunity to save more and longer for retirement, at a lower cost. The majority of the SECURE Act 2.0 provisions will be effective in 2024. NOTE: For information on SECURE Act 2.0 provisions for Employers, click here.
Provisions for Plan Participants
New RMD Start Date. Under SECURE Act 2.0, the age for RMDs was increased to 73 – offering employees an additional year to increase the savings in their tax-free retirement accounts and avoid a taxable distribution. Their first RMD must be taken by April 1 of the year they turn 73, and by December 31 each following year.
Then, starting in 2033, SECURE Act 2.0 again pushes the age at which RMDs must start to 75.
Catch-Up Contributions. Currently, 401(k) participants who are age 50 or older can make an extra “catch-up contribution,” subject to an annual limit ($7,500 in 2023). Beginning in 2025, SECURE 2.0 creates a special catch-up limit for employees who are ages 60 to 63 and participate in their employer’s 401(k) or 403(b) plan. This special catch-up limit is the greater of $10,000, or 150% of the regular catch-up amount in effect for the taxable year, and will be indexed for inflation annually. This provision is mandatory and requires a plan amendment.
SECURE Act 2.0 requires that catch-up contributions are designated as Roth contributions for any plan participant whose wages exceed $145,000, effective for tax years after 2023. Employers can make matching and non-elective contributions to designated Roth accounts.
Annuity Investment Option. Annuity contracts will be more readily available within employer plans for participants who may want to use a portion of retirement plan savings to provide lifetime income. Prior to SECURE Act 2.0, employer plans were generally constrained in allowing participants to purchase annuities in their accounts due to RMD rules. SECURE Act 2.0 facilitates an employer’s ability to include annuity options and directs the Internal Revenue Service (IRS) to modify regulations within 18 months to allow for more relaxed rules around the payment of premiums for an annuity and how the annuity’s annual payment is considered in the determination of the participant’s RMD.
Limiting IRA Penalties. SECURE Act 2.0 makes clear that an IRA account which loses exempt status due to a prohibited transaction does not result in a loss of exempt status for all IRAs owned by that individual. This provision should encourage those with alternative investments in IRA accounts (which could result in prohibited transactions) to use separate accounts for each investment.
RMD Penalty Relief. Under the old rules, if a retiree missed the RMD deadline, they would incur a penalty of 50% of the amount not taken on time. That penalty has been reduced in SECURE Act 2.0 to 25%, and in some cases, 10% if corrected within two years. The penalty is further reduced if correction is made within two years after the end of the taxable year in which the distribution was missed.
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 Act 2.0, 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.
College Loans and Savings
Student Loan Repayments. A few years ago, the Internal Revenue Service (IRS) approved a plan that allowed employer contributions to be made to a 401(k) plan for employees who were repaying their student loans. Beginning in 2024, an employee’s student loan debt repayment can be treated as the employee’s salary deferral to a 401(k) or 403(b) plan. This is an option that an employer can add to their retirement savings plan. The advantage of the provision is to increase retirement savings for employees by allowing employer matching contributions to be made for compensation amounts employees use to pay down debt, rather than defer into the employer’s retirement savings plan.
Saver’s Match. The SECURE Act 2.0 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.
Convert College Savings to Roth IRA. Many individuals contribute to an IRC Section 529 plan to save for an individual’s education costs. Sometimes, these accounts hold funds that are no longer needed for education. SECURE Act 2.0 creates a new option for continuing to grow these funds in a tax-exempt vehicle. In 2024, owners of certain 529 plan accounts may transfer these savings into a Roth IRA. This option applies to a 529 plan account that has been in effect for at least 15 years, and the amount transferred does not exceed the total of contributions made to the 529 plan during the most recent five years. Finally, the amount transferred during a year is limited to the annual amount allowed as a Roth IRA contribution and all transfers are limited to a maximum of $35,000.
Emergency Savings and Distributions
Emergencies. The new law permits employers to add provisions to their plans to help non-highly compensated employees save for emergencies. Employee contributions to these emergency savings accounts are not part of the employee’s regular retirement savings. The emergency savings funds are separately accounted, and amounts are withdrawn at the discretion of the plan participant. The employee’s emergency savings account balance is generally limited to no more than $2,500.
SECURE Act 2.0 also allows participants to withdraw up to $1,000 for personal emergency expenses. These are unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. Only one distribution is allowed a year and the distributions are not subject to the 10% penalty for early withdrawal for those under the age of 59½. Employer plans can also add similar withdrawal provisions that are exempt from the 10% penalty for terminally ill plan participants and for those who are victims of domestic abuse.
Disasters. Effective for disasters after December 27, 2020, SECURE Act 2.0 permanently exempts plan distributions from the 10% penalty for early withdrawal when meeting the following provisions:
- The individual withdraws no more than $22,000
- The individual’s principal place of residence is in a federally declared disaster area
- The individual sustains an economic loss because of the disaster.
A qualifying disaster-related distribution can be included in income over three years, or the individual can repay the distribution amount to the plan within three years. Using the above criteria, an individual can borrow from the qualified plan up to a maximum of $100,000 or 100% of the vested account balance. Loan repayment periods for these individuals for existing loans are extended for one year.
Learn More. Keep in mind that this is only an overview of key changes that will take effect in 2023 and 2024. Other provisions in the law will apply in later years. We can guide you through the new Secure Act 2.0 law to ensure you are taking advantage of the available credits and provisions. Contact our Tax Department specialists to set up a meeting.