In late 2022, a bill called SECURE 2.0 was signed into law. There’s nothing revolutionary in the law; it’s more of a kitchen sink of various adjustments and tweaks to retirement plan and IRA rules. There are dozens of parts to the law, but some changes are important and relevant for typical investors and we’ll highlight some meaningful ones here.
Delayed Age for Required Minimum Distributions (RMDs): SECURE 2.0 increases the required minimum distribution age to 73 starting on January 1, 2023, and increases the age further to 75 starting on January 1, 2033. This is meaningful because it allows the option to defer taxes to later in life.
No More RMDs for Roth 401(k)s: Previously, all 401(k) plans required RMDs (including Roth). This change is a fix to an oversight — typically Roth accounts don’t have RMDs.
Leniency for RMD Mistakes: RMD mistakes are extremely costly, and now only slightly less so. This law reduces the penalty for a missed RMD from 50 percent to 25 percent. If a mistake is corrected quickly and proactively, then the penalty might be only 10 percent.
529 to Roth IRA Transfer: Effective in 2024, if you have an unused balance in a 529 plan, you can transfer those funds to your child’s Roth IRA tax-free. The most you can transfer is $35,000 over a lifetime. These transfers reduce the amount of your child’s regular contributions, and they must be eligible to make contributions to a Roth IRA (i.e. have earned income, etc.). The 529 plan must have been maintained for at least 15 years, and the funds eligible for transfer must have been in the 529 plan for five-plus years.
New Future Limit for Qualified Charitable Distributions (QCDs): For years, the maximum annual QCD amount was limited to $100,000. Beginning in 2024, the limit will be linked to inflation.
Mandatory 401(k) Enrollment: Requires new 401(k) and 403(b) plans started after 2024 to automatically enroll participants in the plan with at least 3 percent but not more than 10 percent contribution, with automatic increases of 1 percent until contributions reach 10 percent but not more than 15 percent of income.
New Catch-Up Contribution: Increases the catch-up contribution to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62, and 63. The increased amounts are indexed for inflation after 2025. New limits are effective for taxable years beginning in 2025.
Matching Student Loan Payments: Allows employees to receive matching contributions by reason of repaying their student loans rather than contributing to retirement plans. This is effective for contributions made for plan years beginning after December 31, 2023.
Retirement Savings Lost and Found: Creates a national online searchable lost-and-found database for retirement plans at the Department of Labor (DOL), allowing participants to search for the contact information of their plan administrator. Directs the creation of the database no later than two years after the date of enactment of SECURE 2.0.
Catch-Up Contributions Must Be Roth: The cost of SECURE 2.0 will be offset by requiring that catch-up contributions be designated as Roth contributions. This provision will apply to eligible participants whose wages for the preceding calendar year exceed $145,000 and is effective for taxable years beginning after December 31, 2023.
SECURE 2.0 was broadly bipartisan and is largely main-street investor friendly, which is refreshing news coming from Washington. It’s definitely worth you or your advisor thinking through how these changes might help you. Retirement always creeps up more quickly than new retirees ever imagined possible, and every little bit helps on the path to your secure financial future.
Gene Gard, CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.