President Biden signed the Consolidated Appropriations Act of 2023 on December 30, 2022. This omnibus spending bill provided roughly $1.7 trillion for federal agencies and included a suite of retirement policy changes commonly called SECURE 2.0.
Congress passed the original SECURE Act in 2019 to help participants in workplace retirement plans and IRA owners. SECURE 2.0 has over 90 provisions. Some changes take effect this year, and others are delayed until 2024, 2025, 2026, or even 2033. This article will review some of the changes that could impact you.
Required minimum distributions (RMD) for owners of traditional IRAs, 401(k)s, and other qualified retirement accounts rise to age 73. This change affects those born on or after January 1, 1951, and before January 1, 1960. The RMD age change will not prevent many working retirement account holders from deferring RMDs under the “still working” exception.
Under the Consolidated Appropriations Act, no IRA owner will have their first RMD year in 2023. The first-year distributions will be required for anyone impacted by the new law is 2024.
Delayed RMD ages present tax planning opportunities—like more time to do Roth conversions without having to take the RMD first.
The hefty 50% penalty for missed RMDs is reduced to 25%. If the missed RMDs are corrected promptly, the penalty is reduced to 10%. A three-year statute of limitations for the RMD penalty is also added. Provided the tax return is filed on time, the statute of limitations begins on the date the 1040 is filed.
For charitably inclined IRA owners, qualified charitable distributions (QCD) are still available at age 70½, regardless of whether their RMD age is 70½, 72, or 73. However, the $100,000 annual QCD cap will be indexed yearly for inflation beginning in 2024. Starting in 2023, a one-time-only, $50,000 qualified charitable distribution (QCD) to a charitable gift annuity, charitable remainder unitrust, or a charitable remainder annuity trust will be allowed.
If an individual withdraws IRA or retirement plan assets before age 59½, they will incur a 10% penalty—in addition to any taxes owed on the distribution. Historically, more than a dozen exceptions to the penalty have existed. SECURE 2.0 adds several new 10% penalty exceptions with different effective dates. Victims of federally declared disasters can withdraw up to $22,000 from an IRA or workplace retirement plan with no penalty. Tax on these distributions can be paid over three years, beginning with the payout year, unless the individual pays the tax all at once. Other exemptions include distributions for:
- Terminal illness (effective immediately)
- Pension-linked emergency savings accounts ($2,500 limit, effective 2024)
- Domestic abuse ($10,000 limit, effective 2024)
- Financial emergencies ($1,000 limit, effective 2024)
- Long-term care ($2,500 limit, effective 2025)
Some exceptions apply to IRAs and employer-sponsored plans, some to IRAs only, and others only to plans. These new 10% penalty exceptions carry strict eligibility guidelines and various effective dates.
The age 50 exception to the 10% early distribution penalty is extended to include public safety workers with at least 25 years of service. Corrections officers and private-sector firefighters will also be able to take advantage of this exception.
SEP and SIMPLE plans can allow Roth contributions beginning in 2023.
Roth 401(k) owners will no longer need to take RMDs, which will conform to the rule that already applies to Roth IRA account owners. All plan catch-up contributions for age 50+ income employees will have to be Roth contributions starting in 2024. Beginning immediately, plans can allow employer-matching contributions to be made on a Roth basis.
The employee contribution limits for SIMPLE IRAs and SIMPLE 401(k)s will rise. The limits will increase by 10% for employers with 25 or fewer workers. An employer with 26–100 workers would also be able to have higher SIMPLE contribution limits, provided the employer meets certain criteria. Another change lets employers make up to $5,000 more in contributions to SIMPLEs.
Also, plan sponsors will be able to create Pension-Linked Emergency Savings Accounts (optional for employers to install). Pension-linked emergency savings accounts will only be available to employees eligible to participate in the employer’s plan who are not “highly compensated.” Contributions will be made on a Roth-like basis and will be eligible for employer-matching contributions. The amount attributable to the participant’s contribution (not counting any match) will be capped at $2,500 (or lower as set by the employer). Once the cap is reached, future contributions can be redirected to the standard Roth bucket within the employer plan.
529 plans have helped millions of American families save for higher education in tax-favored accounts. Starting in tax year 2024, some 529 dollars can be rolled to a Roth IRA untaxed and un-penalized once the beneficiary has ceased withdrawing money for higher education expenses.
To execute a 529-to-Roth IRA rollover, the 529 account will need to have existed for at least 15 years. So, it may make sense to open a 529 account for young children who would meet this test soon after finishing their education. The maximum amount that can be rolled from a 529 account to a Roth IRA will be $35,000, and the total will not be able to exceed the annual contribution limits to a Roth IRA. The lifetime cap is not indexed for inflation.
Employers will have to automatically enroll eligible participants in plans, with employees able to opt-out (there will be exceptions for existing plans and small firms). Workers ages 60–63 will be able to contribute more money to employer-sponsored plans equal to $10,000 or 50% of the regular catch-up for the year (whichever is greater).
Companies with 401(k) plans will have to allow workers who work at least 500 hours a year for at least two consecutive years to become eligible for the plan.
In 2014, Congress authorized Achieving a Better Life Experience (ABLE) accounts. ABLE accounts allow beneficiaries with qualifying disabilities to save in a tax-advantaged account, provided the money is spent on eligible expenses, including higher education and basic living and housing expenses.
Currently, only people who become blind or disabled before age 26 can open tax-preferred ABLE accounts. SECURE 2.0 will increase this age to 46.
2027 brings a significant change for low- and middle-income retirement savers. The underutilized Saver’s Credit, intended to help lower-income savers, has been updated with a government match paid directly to retirement accounts. Current laws cap the maximum credit at $2,000 for joint filers and $1,000 for others, depending on adjusted gross income. The income tax credit will be replaced with a 50% government match on up to $2,000 of contributions per individual, which will be deposited into the taxpayer’s retirement account.
For owners of traditional IRAs, 401(k)s, and other qualified retirement accounts who were born on or after January 1, 1959, RMDs will rise to 75.
- SECURE 2.0 raises the first RMD age to 73 in 2023 and then age 75 in 2033.
- For charitably inclined IRA owners, QCDs are still available at age 70½, regardless of whether their RMD age is 70½, 72, 73, or 75.
- Starting in tax year 2024, some 529 dollars can be rolled to a Roth IRA without taxes or penalties.