SECURE Act 2.0
Dear Clients & Friends,
Once again, allow me to introduce our newest associate, Devin Rainone. Some
very important legislation, which affects almost every one of our clients, was
recently passed by Congress. Thus, I’ve invited Devin to prepare his very first
Weekend Reading. So, listen up! This affects all of you.
Devin, the floor is yours…
Despite how frustrating this year has been, the late hours of 2022 have
brought some good news to share. Days before Christmas, Congress passed its
Omnibus Bill for FY 2023 which is now headed to the White House for the
President to sign into law. Within this “brief” 4,000-page bill lies some major
reforms to the retirement planning landscape.
If anyone is looking for a good read, turn to page 2,046 for the long-awaited
SECURE 2.0 Act. This legislation builds off its sister bill, the SECURE Act of
2019, with the hope of enhancing the ability of Americans to save for
retirement. I’ve summarized some of the major highlights below.
Retirement Savings / Contributions:
IRA Catch-Up Limits: As it currently stands, IRA catch-up contributions for
individuals ages 50 and older are limited to $1,000, unadjusted for
inflation. After December 31, 2023, the catch-up contribution limit will be
adjusted for inflation.
Catch-Up Contribution Limits: Earlier this year, the IRS announced an increase
of the contribution limit for 401(k), 403(b), and most 457 plans, as well as the
federal government's TSP (Thrift Savings Plan). The limit will be raised from
$20,500 to $22,500. In addition, the catch-up contribution limit increased from
$6,500 to $7,500 for plan participants ages 50 and older.
Secure 2.0 also raised the catch-up contribution limit for individuals who are
ages 60 to 63. Starting in 2025, the limit will be raised to whichever is greater:
$10,000, or 50% more than the regular catch-up amount referred to
above. These limitations will be subject to inflation adjustments starting in
Finally, the bill mandated that all catch-up contributions will be subject to Roth
rules after calendar year 2023. This means that catch-up contributions will be
made with after-tax dollars. These contributions will not be tax deductible, but
can be withdrawn tax free. While the majority of our clients will likely benefit
from this change, we as a firm are not in favor of this mandate because Roth
contributions are not necessarily beneficial to all retirement plan
participants. We feel that this would be a terrific option to have, but to
mandate this kind of tax treatment is a bit over-reaching.
Automatic Enrollment: Starting at the end of 2023, 401(k) and 403(b) plans
will now be required to automatically enroll participants in their respective
plans when the participant becomes eligible. The automatic enrollment amount
cannot be less than 3% or more than 10% of the participants
compensation. This amount increases by 1% per year until it reaches a
minimum of 10% and is capped at 15%.
Small Incentives: Employers are no longer prohibited from offering small and
immediate incentives, such as gift cards, in exchange for employees making
elective deferrals. This goes into effect once the bill gets signed into law.
Qualifying Longevity Annuity Contracts (QLACs): Prior to the passage of
SECURE 2.0, QLACs were limited to the lesser of the following amounts:
$135,000, or 25% of your qualified retirement account balance. The new bill
removed the account value cap and increased the $125,000 limit to
529 meets Roth IRA: This provision of the bill allows for tax-free and penaltyfree
rollovers from 529 plans into Roth IRAs. This is HUGE! Beneficiaries of
529 college savings accounts would be allowed to roll over up to $35,000 over
their lifetime from any 529 account for which they are named as a beneficiary
into their Roth IRA. There are a few caveats: these rollovers would be subject
to annual Roth IRA contribution limits, and the 529 plan must have been open
for more than 15 years. Distributions made after December 31, 2023 can take
advantage of this new provision.
Student Loans: For plan years beginning after 2023, employers could help their
employees with student loans by making matching contribution payments to
an employee’s retirement plan. These matching payments would be based on
the employee’s student loan payments.
Types of Distributions:
Required Minimum Distributions: SECURE 2019 raised the RMD age from 70.5
to 72. SECURE 2.0 increases the RMD age to 73 beginning on January 1, 2023.
The age would be raised to 74 on January 1, 2030, and to 75 at the beginning
Penalties: The penalty for failing to take an RMD was reduced from 50% to
25%. However, if the failure to take an RMD from an IRA was corrected in a
timely manner, the excise tax would be reduced from 25% to 10%!
Domestic Abuse: After December 31, 2023, retirement plans will allow
participants who have self-certified that they have experienced domestic abuse
to withdraw the lesser of either $10,000 (adjusted for inflation) or 50% of the
account. This distribution would not be subject to the 10% penalty on early
distributions, and the participant would have the opportunity to repay the
withdrawn money over 3 years, and any taxes on said withdrawal would be
Federal Disasters: In the case of a federally declared disaster, the new
mandate would allow up to $22,000 to be distributed from employer
retirement plans or IRAs. These distributions would not be subject to the 10%
tax on early distributions and could be repaid into a tax-preferred retirement
account. This would be effective for disasters occurring on or after January 26,
Long-Term Care Premiums: Individuals could withdraw up to $2,500 per year
from retirement plans to pay for premiums on certain long-term care
insurance contracts. These withdrawals would be exempt from the 10% tax on
early distributions. In order to be eligible for this provision, the policy must
provide high-quality coverage. This provision would go into effect 3 years after
the enactment of this legislation.
Emergencies: Up to $1,000 a year could be withdrawn for emergency
expenses. Only one distribution would be allowed per year, and a taxpayer
would have the option to repay the distribution within three years. Until the
distribution is repaid in full, no further emergency distributions would be
allowed. This provision would be effective for distributions made after
December 31, 2023.
Other sections of the bill are aimed at aiding small businesses with setting up
and implementing retirement plans. There are also provisions enhancing
“savers” tax credits for individuals. The bill aims to amend rules related to
hardship distributions from qualified retirement plans (hardship distributions hit
a record high in October of 2022 for plans administered by Vanguard). Overall,
SECURE 2.0 has received praise as a comprehensive, bipartisan piece of
legislation that addresses the major issues our country faces with the
retirement planning landscape. As always, reach out if you have any questions
or thoughts on this new act.
Cheers to 2023!
Your MORWM “newbie,” Devin
*Data provided by FactSet