The Secure Act 2.0 overhauls, pioneers, and expands upon many new rules for retirement savers. But what are key provisions that new retirees should be aware of? The full text of the Omnibus bill text is here.

What are the important retirement provisions?

Section 107: Increases to RMD ages for some retirees

Effective immediately, certain retirees will now have later beginning dates for their required minimum distributions (RMDs). If born 1950 or earlier there will be no changes to RMDs. Those born between 1951-1959 will have a new RMD beginning date of age 73. And finally, individuals born 1960 (or later) will have an RMD beginning date of age 75.

• Timeline: 2023
• Planning importance: High

Section 302: RMD penalty changes

Effective immediately, the penalty for a missed RMD reduces to 25% – or 10% if filed “timely.”

• Timeline: 2023
• Planning importance: High

Section 523: A retirement account “lost and found”

This provision creates a new system to easily find and recover funds from old retirement accounts.

• Timeline: Within 2 years
• Planning importance: High

Section 601: Creation of SEP and SIMPLE Roth designated accounts.

This provision allows SEP and SIMPLE plans to formally have a Roth component (previously available only through various conversion techniques). We expect this to roll out as custodians conform technology to the new law – which may take some time. We’re still trying to confirm eligibility details. As you may know, current Roths in 401(k) plans do not have AGI income-based eligibility requirements to contribute (unlike Roth IRAs).

• Timeline: 2023
• Planning importance: High

Section 109: Employer plan catch-up increases

A  new $10,000 (or 150% of the regular catch-up amount) will apply for individuals starting in 2025 who have attained age 60-63 (but not age 64 and older). Regular catch-up rules apply to everyone else.

• Timeline: 2025
• Planning importance: High

Section 604: New Employer Roth contributions

Employers are now permitted to make post-tax Roth contributions to plans for their employees (versus solely deferred-tax employer contributions). Of course, the money is taxable to the participant but will grow tax-free.

• Timeline: 2023
• Planning importance: High

Section 603: The mandatory Roth catch-up.

This provision makes mandatory certain individuals’ employer plan catch-up contributions to the after-tax Roth component of the plan. However, this applies only to those making more than $145,000 the prior year with the employer. We’re still trying to confirm if these are, in fact, gross numbers with any single employer and not based on total taxable income (or adjusted gross income).

• Timeline: 2024
• Planning importance: High

Section 326: Penalty-free distributions for terminally-ill individuals

This provision immediately extends the existing penalty exception for those individuals expected to pass within 7 years (or 84 months). Previously the provision was 2 years (or 24 months).

• Timeline: 2023
• Planning importance: High

Section 327: Surviving spouse RMDs

When advantageous, this provision permits the option for a surviving spouse to take the RMDs of a deceased spouse (versus the typical spousal rollover). Specifically, the surviving spouse may potentially benefit by delaying RMDs and using the deceased spouse’s longevity assumption based on the uniform lifetime table. This is opposed to using the surviving spouse’s longevity assumption. We’re still trying to confirm if this option depends upon the spouse being a “sole designated beneficiary,” like the other options available to inherited spousal deferred accounts.

• Timeline: 2024
• Planning importance: High

Section 328: Direct payment from employer plans for Qualified LTC premiums.

This provision allows qualified payment from retirement accounts to pay health and long-term care premiums. We are still confirming the precise types of policies this applies to (i.e., standalone, whole-life contracts with LTC riders, etc.) The provision does not change the taxable withdrawal but avoids the early withdrawal penalty.

• Timeline: 2023
• Planning importance: Moderate

Section 101: Expansion of automatic enrollment in 401(k) plans

This provision requires plan administrators to automatically enroll employees at a required rate of 3-10% if meeting certain employment requirements. Employees may opt-out of the plan.

A 401(k) or 403(b) plan in place before the enactment is considered grandfathered. There is also an exception for small businesses (with fewer than 10 employees), new businesses, church plans, and governmental plans. The provision does not apply to SIMPLE plans.

• Timeline: 2025
• Planning importance: Moderate

Section 108: Indexing of the IRA catch-up limit

Starting in 2024, the IRA catch-up limit will index annually to keep up with inflation. This will also make the annual catch-up increases more predictable for planning purposes.

• Timeline: 2024
• Planning importance: Moderate

Section 126: 529 to Roth IRA rollovers are now permitted

A rollover is limited to beneficiaries of the 529 (not the owner). The account must have been in place for more than 15 years. Interestingly the transfer is limited to the annual contribution thresholds for Roth IRAs (minus any Roth IRA contributions actually made). The lifetime maximum is also $35,000. We’re still confirming that the past 5 years’ contributions and earnings are not transferable and that there are no income limitations as there are with Roth IRA contributions but not with Roth 401(k)s.

• Timeline: 2024
• Planning importance: Moderate

Section 325: Elimination of RMDs for employer plan Roth accounts

This detail was often overlooked, but is now eliminated. RMDs for Roths were only applicable to those that choose to leave their Roth 401(k), Roth 403(b), and Roth 457 plans with their employer. There is no longer an inherent planning benefit to rolling out of an employer plan Roth to avoid the Roth RMD.

• Timeline: 2024
• Planning importance: Moderate

Section 307: Qualified Charitable Distributions (QCD)

The maximum amount for a Qualified Charitable Distribution (QCD) remains $100,000, but starting in 2024, the QCD will include indexing to keep up with inflation. As a married couple, the allowable amount is $200,000. Special rules apply to certain trusts.

• Timeline: 2023
• Planning importance: Moderate

Section 127: New “emergency” tax-free withdrawal provisions

This provision allows employers to offer non-highly compensated employees pension-linked emergency savings accounts funded on an after-tax Roth-like basis. Employers may automatically opt employees into these accounts at no more than 3% of their salary but capped at $2,500. Assets must be held in a generally liquid cash or similar interest-bearing investment. We’re still trying to better understand any employer options or requirements to match the employee’s contribution.

• Timeline: 2024
• Planning importance: High

Section 121: New “Starter” 401(k) & 403(b) plans

A “starter” plan designed for employers that do not have a sponsored retirement plan available to employees. The plan allows for solely the deferral of tax on contributions and earnings. The plan has a default automatic enrollment of 3-15%. Contribution limits and catch-ups are equal to those of IRAs.

• Timeline: 2023 (403(b) in 2024)
• Planning importance: Moderate

What else should I know?

Section 314: Penalty-free distributions for domestic abuse victims

This provision permits domestic abuse victims to withdraw 50% of the balance from a retirement account or $10,000 (whichever is less). The distribution is not subject to the normal 10% early distribution penalty, and the owner also has the right to pay it back.

• Timeline: 2024

Section 331: Penalty-free withdrawals associated with qualified federally declared disasters

This provision permits penalty-free retirement plan withdrawals from retirement accounts (IRA 401(k), 403(b), 457 plans). The provision is retroactive to disasters occurring on or after 1/26/2021. Income can be repaid and spread over 3 years to a maximum of $22,000. Distributions are not subject to the 10% early withdrawal penalty and are considered with gross income over 3 years. Owners have the option to repay distributions to a qualified retirement plan.

• Timeline: Retroactive to 1/26/2021

Section 323: 72(t) exception to the 10% penalty clarifications

The old 72(t) exception allows individuals to avoid the early withdrawal penalty by taking “substantially equal payments” based on the individual’s longevity assumptions. The provision further clarifies this in the case of rollovers, an annuity satisfying the required payments, or when the annuity meets required minimum distribution (RMD) rules. The provision generally provides greater flexibility and coordination when utilizing the 72(t) exception.

• Timeline: 2024

Section 116 & 117: SIMPLE plan changes

Previously under SIMPLE plans, rules were such that employers were required to contribute either 2% of total compensation (regardless of any employee deferrals) or 3% of an employee’s elective deferral contributions. The provision increases the allowable non-elective employer deferral to be as much as 10% of compensation or $5,000 of income for the year (whichever is less). These amounts will also now index for inflation in future years.

• Timeline: 2024

Section 103:  The Saver’s Match

Intended to replace the old Saver’s Credit, this is a federal match deposited into the taxpayer’s IRA or retirement plan with a maximum contribution of $2,000. The match is 50% of IRA or retirement plan contributions up to the $2,000 per person. The match phases out between $41,000 and $71,000 in the case of taxpayers filing a joint return, $20,500 to $35,500 for single taxpayers, and for married filing separately, $30,750 to $53,250 for heads of household.

• Timeline: 2027

Section 110: Student debt matching

This provision helps individuals avoid “missing out” on employer matching simply by not having the flexibility to contribute to an employer plan. Under the provision, student loan payments are treated essentially as elective deferrals for qualifying for matching purposes. The provision permits an employer to make matching contributions under a 401(k), 403(b), SIMPLE, or 457 plan. Verification with respect to “qualified student loan payments” is applicable.

• Timeline: 2024

Section 316: Sole proprietors added to § 401(b)(2) plan adoption rules.

New sole proprietor plans (or 100% owners) add to the existing provision.

• Timeline: 2023

 

Editor’s note: This blog offers informal investment and financial planning advice. We know nothing about your unique financial situation. The buying and selling of any financial product or security should only be considered in context. If appropriate, seek the counsel of experienced, ideally objective, financial, tax, or estate planning professionals. Past performance is not indicative of future performance.