SECURE Act 2.0: 5 Key Changes for Your Retirement

SECURE 2.0 Act was signed into law in late 2022, delivering dozens of new retirement-related provisions. These changes build on the original SECURE Act of 2019, which altered the rules around how you can save and withdraw money from your retirement accounts. SECURE 2.0 Act addresses additional issues related to retirement and savings that were not part of the original SECURE Act, creating new flexibility and accessibility to help individuals plan for a more secure future.

The lack of retirement preparedness among Americans has drawn the attention of Washington policymakers. According to one study, by 2050, the U.S. will face a $137 trillion retirement income gap (the difference between what savers should have and what they’ve actually saved). If projections hold, retirees in six major economies (including the U.S.) would outlive their savings by an average of eight to 20 years.   These new changes were instituted to help empower savers to reach goals that they may not have been able to otherwise.

After reviewing many of the changes, these are the top 5 changes that we think impact our THRIVE community the most.

1. Raising the Starting Age For RMDs

Effective Jan. 1, 2023, the threshold age that determines when individuals must begin taking  from traditional IRAs and workplace retirement plans increases from 72 to 73. As a result, individuals now    can choose to delay taking their first RMD until April 1 of the year following the year in which they reach age 73. From that point on, RMDs must be received each year by December 31.  On Jan. 1, 2033, the threshold age for RMDs will rise to 75.

This lengthens our tax planning window to help mitigate taxes in the future while tax rates remain at 90 year lows.

2. Reduced Penalties for Missed RMDs

In addition to the extension of the RMD threshold age, the penalty for failing to take RMDs on a timely basis is cut in half effective in 2023, from 50% of the undistributed amount to 25%. If, however, the shortfall is rectified within the “Correction Window,” then the penalty is further reduced to only 10%.

Per SECURE Act 2.0, the “Correction Window” is defined as beginning on the date that tax penalty is imposed (so, generally January 1st of the year following the year of the missed RMD), and ends upon the earliest of the following dates:

• When the Notice of Deficiency is mailed to the taxpayer;
• When the tax is assessed by the IRS; or
• The last day of the second tax year after the tax is imposed.

Although these changes do not preclude a taxpayer from seeking to have the penalty abated altogether, for smaller missed distributions the timely fixed missed RMD penalty dropping to just 10% may give some individuals an incentive simply to pay the penalty and move on.

It is never a good idea to miss your RMD for the year, but the reduction in penalty is now much more reasonable should mistakes occur.

3. Rollovers of 529 Plan balances to Roth IRAs

Under prior law (still in effect in 2023), leftover balances in 529 education savings plans can be taken as a non-qualified distribution, but the earnings portion of the distribution is subject to income tax and a 10% penalty. Beginning in 2024, based on provisions in the new law, you’re allowed to roll up to $35,000 of leftover funds into a Roth IRA.

The $35,000 threshold is a lifetime limit subject to a few restrictions. The 529 account must have been in place for at least 15 years and funds must move directly into a Roth IRA for the same individual who was the beneficiary of the 529 plan. Any 529 plan contributions made in the previous five years, and any earnings attributed to those contributions, are not eligible to be rolled into a Roth IRA. The amount moved into a Roth IRA a given year must be within annual IRA contribution limits.

This now reduces the fear of overfunding a 529 college savings plan by allowing excess funds to be used for other planning purposes without penalty.

4. New Post-Death Option For Surviving-Spouse Beneficiaries Of Retirement Accounts

Under existing law, when a surviving spouse inherits a retirement account from a deceased spouse, they have a variety of options at their disposal that are not available to any other beneficiary (e.g., rolling the decedent’s IRA into their own, electing to treat the decedent’s IRA as their own, and remaining a beneficiary of the decedent’s IRA, but with special treatment). And beginning in 2024, Section 327 of SECURE Act 2.0 will extend the list of spouse-beneficiary-only options further by introducing the ability to elect to be treated as the deceased spouse.

Making such an election would provide the following benefits to the surviving spouse:

• RMDs for the surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin;
• Once RMDs are necessary (the year the decedent would have reached RMD age, had they lived), the surviving spouse will calculate RMDs using the Uniform Lifetime Table that is used by account owners, rather than the Single Lifetime Table that applies to beneficiaries; and
• If the surviving spouse dies before RMDs begin, the surviving spouse’s beneficiaries will be treated as though they were the original beneficiaries of the account (which would allow any Eligible Designated Beneficiaries to ‘stretch’ distributions over their life expectancy instead of being stuck with the 10-Year Rule that would otherwise apply).

The primary use case will be for surviving spouses who inherit retirement accounts from a younger spouse. By electing to treat themselves as the decedent, they will be able to delay RMDs longer, and once RMDs do start, they will be smaller than if the spouse had made a spousal rollover or remained a beneficiary of the account.

5. Changes to Roth Employer Plans

Under current law, there are no provisions that accommodate employer matching contributions to employees’ after-tax Roth 401(k) plan contributions. Effective in 2023, individuals can choose to have employer matching contributions directed to their Roth workplace accounts. These contributions will be considered taxable income in the year of the contribution.

Under current law, Roth 401(k)s (unlike Roth IRAs), are subject to RMDs. A provision in the SECURE 2.0 Act eliminates RMD requirements for workplace-based Roth plans beginning in 2024. This change results in Roth 401(k)s having similar treatment related to RMDs as Roth IRAs.

In addition, effective in 2023, employers will be allowed to create Roth accounts, open to after-tax contributions, for SIMPLE and SEP retirement plans. Under previous law, these plans only allowed for pre-tax contributions.

Notably, while SECURE Act 2.0 authorizes such contributions immediately upon enactment, employers and plan administrators will need time to update systems, paperwork, and procedures to accommodate the change. As such, it may take some time before employers actually have the ability to direct contributions in such a manner.