The New SECURE 2.0 Bill May Alter Your Retirement Plan
December 29, 2022
On December 23, 2022, the US House of Representatives passed the omnibus Consolidated Appropriations Act of 2023 that included a retirement bill titled SECURE Act 2.0. This bill is expected to be signed into law tomorrow. The Setting Up Every Community for Retirement Enhancement Act 2.0 includes several measures meant to encourage increased retirement savings.
SECURE 2.0 makes several changes to current code that include:
- Raised the Required Minimum Distributions (RMDs) age mandate: SECURE 2.0 elevates the age for required RMDs for individuals born prior to 1960 to age 73. For those born after 1960 the new mandated age for distributions is 75 years old. In addition, the bill decreases the penalty for missed RMDs from a 50% penalty to 25% of the shortfall, and if the mistake is corrected within guidelines, the penalty is reduced to 10%.
- Eliminated the ‘stretch’ IRA option for most non-spouse beneficiaries of retirement plans: this eliminates the ability for beneficiaries to make withdrawals throughout their lifetime by requiring full distribution of an IRA within 10 years of the death of the original account holder. All Required Minimum Distributions are decumulated over 10 years and can no longer ‘stretch’ that period longer which introduces tax implications.
- A significant number of Roth-related changes that align the rules for employer-retirement-plan Roth accounts (both Roth 401(k) and Roth 403(b) plans) with those for individual Roth IRAs by eliminating RMDs. The bill also creates a Roth-style version of SEP and SIMPLE IRA accounts, allowing employers to make matching contributions to the Roth side of the retirement plan “after tax” instead of just the pre-tax portion and allowing for transfers from 529 plans to Roth IRAs.
Some of the other components of this bill include:
- Making IRA catch-up contributions subject to COLAs beginning in 2024.
- Increasing 401(k) and similar catch-up contributions.
- Creating a new “Starter 401(k)” plan aimed at small businesses which allows for auto-enrollment and contribution limits equal to the IRA contribution limits.
- Treating student loan payments as elective deferrals for employer matching purposes in workplace retirement accounts which would allow student loan borrowers to benefit from an employer match even if they do not contribute on their own.
While the omnibus spending bill encourages retirement savings, it includes many changes advisors and investors need to know and understand to take advantage of retirement savings opportunities and avoid getting unnecessarily penalized.