Secure Act 2.0

President Biden signed the Consolidated Appropriations Act, 2023, a $1.7 trillion omnibus federal spending bill for fiscal year 2023, on December 29, 2022. Within the bill are the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act 2.0. The SECURE Act 2.0 changes various retirement savings, charitable donations and related rules:

Increased Age for Required Minimum Distributions (RMDs): 

The age at which you must start withdrawing retirement assets (and paying taxes on those assets) is raised from 72 to 73, as of Jan. 1, 2023, and to age 75 10 years later, on Jan. 1, 2033.  

Increased Catch-Up Contributions

For individuals 50 or older, additional contributions to retirement plans are allowed. Secure 2.0 increases the amount of “catch-up” contributions, depending on the type of plan:

  • For 401(k) and other employer-sponsored plans, participants 50 or older can make an additional “catch-up” contribution of $7,500 in 2023, which increases with inflation after 2023.
  • Participants ages 60 through 63 can make catch-up contributions equal to the greater of $10,000 or 150% of the regular catch-up limit beginning in 2025.  Further, that $10,000 amount also will be indexed for inflation.
  • Beginning 2024, catch-up contributions for participants with compensation greater than $145,000 (indexed for inflation) from the plan sponsor in the prior year must be made to a Roth account, which means contributed on an after-tax basis.
  • For Traditional and Roth IRAs, individuals over 50 can contribute to traditional or Roth IRAs up to $1,000 currently, which amount will be indexed for inflation on an annual basis beginning 2024.

Increased Qualified Charitable Distributions (QCDs)

  • Currently, individuals over 70½ or older can contribute up to $100,000 directly from an IRA to a qualified charity without recognizing any income on the “withdrawn” donated amount, which also can count toward the individual’s RMD. Going forward, the $100,000 amount will be indexed for inflation.
  • For individuals who are 70½ or older, a new provision, part of the Legacy IRA Act, allows a one-time QCD of up to $50,000 from an IRA to a charitable gift annuity (CGA), charitable remainder unitrust (CRUT) or charitable remainder annuity trust (CRAT), for the benefit of a participant or their spouse.  Like an annual QCD, the $50,000 one-time QCD can also count toward an individual’s RMD.
  • By making a QCD, individuals can avoid being taxed on the distribution at higher ordinary income tax rates. In addition, by reducing adjusted gross income with a QCD, an individual may reduce the amount of their income, subject to the 3.8% net investment income tax, and they may also end up in a lower overall tax bracket, which could increase their eligibility for certain tax credits and deductions.

Increased Benefits Related to Education

  • A new provision permits certain beneficiaries to roll over up to a lifetime limit of $35,000 from their 529 college savings plan to a Roth IRA, free of any tax or penalties. This change will allow flexibility down the road for beneficiaries with 529 plans that are overfunded. These further rules apply:
    • The 529 plan must be open for at least 15 years.
    • Any contributions to the 529 plan within the last five years (and the earnings on those contributions) are ineligible to be rolled over to a Roth IRA.
    • The amount that can be rolled over to a Roth IRA is limited each year based on annual contribution limitations (currently, $6,500 for 2023 or $7,500 if age 50 or older), which will apply to the aggregate of any rolled-over amounts from 529 plans plus any other contributed funds.
  • Starting in 2024, employers can match student loan payments with contributions to an employee’s retirement plan. Thus, an employee can pay down student debt instead of saving for retirement.

Other additional important changes include:

  • There are no mandatory RMDs from 401(k), 403(b) or 457(b) Roth accounts. To align the Roth IRA rules with Roth accounts maintained under a 401(k), 403(b) or 457(b) plans, beginning 2024 there are no longer any required minimum distributions from a designated Roth account to a participant during the participant’s lifetime(other than RMDs due by April 1 for those reaching their RMD age prior to 2024).
  • RMD rules applicable upon a participant’s death still apply.
  • An employee may elect to have employer matching or nonelective contributions made on a Roth basis, if permitted by a plan.
  • The excise tax of 50% previously applicable to failure to take an RMD is reduced to 25%. The excise tax is further reduced to 10% if the individual: (1) receives all their past-due RMDs; and (2) files a tax return paying such tax before receiving notice of assessment of the RMD excise tax and within two years after the year of the missed RMD.
  • For most 401(k) and 403(b) plans starting with the 2025 plan year, newly eligible employees must be automatically enrolled at a rate of at least 3% of pay with an automatic annual increase of at least 1%, until the participant reaches a contribution level of at least 10% of pay. Certain exceptions apply to governmental plans, small businesses with ten or fewer employees, and plans of new employers in business for less than three years.

In spite of the detail on the new law, several important issues are still not addressed:

  • Whether annual RMDs are required for certain inherited IRAs during the 10-year period after the original owner’s death.
  • Elimination of certain investments from being purchased by an IRA or Roth IRA.
  • Changing limitations on Roth IRA conversions;
  • Changing the minimum age of 70½ for QCDs; and

DR 7/16/2023