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A few years back, we wrote in this space about the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Signed into law in 2019, the SECURE Act made some significant changes to the law regarding retirement accounts, including pushing back the age at which individuals have to take their first required minimum distribution (RMD) and extending the time available to contribute to an Individual Retirement Account (IRA).
As part of the Consolidated Appropriations Act of 2023, SECURE Act 2.0 became law, containing dozens of provisions that may help bolster Americans’ ability to prepare for retirement. Let’s take a look at some of the aspects of the updated law that may be of interest to you.
Changes to Required Minimum Distributions
Just as the SECURE Act changed the age for taking one’s initial RMD from an IRA or 401(k) to 72, SECURE 2.0 is pushing back the age still further, to 73 as of January 1, 2023. (The new law also pushes the age at which one must take one’s initial RMD to 75 in 2033.) An important note; if you turned 72 in 2022 or before, you have to keep taking your scheduled RMDs.
If you don’t take your RMD, you could be subject to steep penalties. However, thanks to the SECURE Act 2.0, those penalties won’t be quite as steep as in the past. In 2022, the penalty was 50% of the amount of the RMD not taken; in 2023, that drops to 25%—still painful, but not quite as bad. And for IRA owners, the penalty is 10% if they withdraw the RMD they had failed to take and promptly file an amended tax return.
For plans with in-plan annuities, if the annuity amount exceeds the amount of the RMD, the excess can be applied to the RMD for that year, effective immediately. And in 2024, Roth accounts that are part of employer retirement plans will be exempt from the RMD requirement altogether.
Enhanced “Catch Up” Options
Older workers have the opportunity to contribute larger amounts to their retirement plans to help them “catch up” for their upcoming retirement. SECURE Act 2.0 has expanded these opportunities by increasing the available “catch-up” amounts.
As of January 1, 2025, people aged 60 through 63 can make annual catch-up contributions of up to $10,000 (indexed to inflation) to a plan through their employer. Currently, individuals 50 and up can make catch-up contributions of up to $7,500 annually for workplace plans and $1,000 for IRAs. The $1,000 catch-up contributions for IRAs will be indexed to inflation beginning in 2024.
Individuals aged 50 and up who earned more than $145,000 in the previous year will need to make any catch-up contributions to a Roth account, which means contributions will need to be made using after-tax dollars. Workers earning below that amount are not required to make catch-up contributions to a Roth account. The $145,000 cutoff figure will be indexed to inflation, meaning it will likely increase in the years to come.
Qualified Charitable Distributions
A qualified charitable distribution (QCD) allows an owner of an IRA to make a donation directly from the taxable account directly to a qualified charity rather than taking an RMD. Because the QCD does not pass through the account owner’s hands, they are not taxed on the amount, and the QCD may keep the IRA owner out of a higher tax bracket.
Thanks to the SECURE Act 2.0, individuals aged 70 ½ and up can make a one-time gift of up to $50,000 to a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT), or a charitable gift annuity. These gifts were not previously permitted for QCDs. The maximum amount of this one-time gift will be adjusted for inflation. If you are interested in making a QCD to a charity, consult with your estate or tax attorney to ensure that your intended charity qualifies.
Automatic Enrollment and Portability for Retirement Plans
While much of this new legislation benefits older workers closing in on retirement, SECURE 2.0 contains good news for younger workers, too. That includes the fact that employers who adopt new 401(k) and 403(b) retirement plans must automatically enroll eligible employees beginning in 2025, with a contribution rate of at least 3%.
In addition, SECURE Act 2.0 allows plan providers to offer automatic portability services so that when an employee changes jobs, their retirement account balance can be automatically transferred to a new plan. That would increase the likelihood of continued retirement savings and reduce the risk that employees would simply cash out their plans.
Student Loan Matching
SECURE 2.0 offers an incentive for young college-educated workers with student loans to save for retirement. Beginning in 2024, employers can match an employee’s student loan payments with equivalent payments to a retirement account.
Changes Affecting 529 Plans
In the past few decades, many parents and grandparents have established 529 plans to help pay for children’s and grandchildren’s educations. Disbursements from those plans were limited to educational expenses, however—until now.
The SECURE Act 2.0 allows taxpayers (beginning in 2024) to convert up to $35,000 from a 529 plan to an IRA for the beneficiary. There are, of course, some limitations. The 529 plan must have been maintained for at least 15 years prior to the rollover of funds. The amount of funds rolled over cannot exceed the total of contributions to the 529 plan for the five years preceding the rollover. Lastly, the amount contributed to the IRA must be transferred directly from the 529 plan to the IRA and cannot, when combined with other IRA contributions for the year, exceed contribution limits.
This is just a SECURE Act 2.0 summary, and these are only some of the many retirement savings opportunities that the new legislation offers. To learn more about the law’s provisions, and what SECURE 2.0 might mean for your retirement savings plans, please contact Estate Planning & Elder Law Services to schedule a consultation.