SECURE 2.0 Act Financial Planning Opportunities in 2023 and Beyond

The SECURE 2.0 Act of 2022, passed last December, has financial planning opportunities for both the accumulation and distribution phases of retirement planning. Below is a brief summary of a few key retirement savings provisions from about 100 changes contained in this legislation:

RMD Changes- Effective January 1, 2023, the starting age for required minimum distributions (RMDs) for people born from 1951 to 1959 is now 73 instead of 72 and the starting age for those born in 1960 or later is now 75. Also, the penalty for missing or insufficient RMD withdrawals was reduced from 50% of the amount that should have been withdrawn, but wasn't, to 25% and 10% if withdrawals are taken in a timely manner.

529 Plan to Roth IRA Transfers- To encourage use of 529 college savings plans, there is a limited opportunity for long-term (at least 15 years) 529 plan owners to directly transfer account funds to a Roth IRA if the money is not needed for college. This rule takes effect in 2024 and Roth IRA income limits do not apply. Transfers count toward the annual limit for Roth IRA deposits ($6,500 in 2023). Do your homework on this savings transfer strategy because several other very specific rules also apply.

 

New Catch-Up Limit- Currently, additional catch-up savings ($7,500 in 2023) in employer retirement plans is available for workers age 50+. Starting in 2025, there will be new catch-up contribution limits for workers aged 60, 61, 62, and 63. The limit will be the greater of $10,000 or 150% of the standard catch-up amount for 401(k)s and similar salary reduction plans.

 

Employer Match for Student Loan Payments- Starting in 2024, employers can match retirement plan participants’ student loan payments using the same vesting and matching schedule as retirement plan deposits. The match money goes into a worker’s retirement plan, not to pay off debt. Employers will rely on employees’ self-certification of loan payments.

 

Employer Retirement Plans- A “starter 401(k)” plan for employers with no current retirement plan will take effect in 2024. No employer contributions are required and plans will be easy to administer. Generally, all employees must be enrolled at a 3% to 15% deferral rate (starting at a minimum of 3% and increasing by 1% per year) with the same limit on contributions as IRAs (currently $6,500 under age 50 and $7,500 age 50+).

 

Auto Enrollment and Escalation- Before SECURE 2.0, auto enrollment and escalation (automatic savings increases) were optional. After 2024, auto-enrollment/escalation must be offered by employers establishing new 401(k) retirement savings plans. Existing plans without these features are “grandfathered” and employers with less than 10 employees are exempt.

 

Early Withdrawal Penalty Exceptions- SECURE 2.0 provided new exceptions to the 10% early withdrawal penalty for retirement accounts including natural disasters, terminal illness, emergency withdrawals, and self-certified domestic abuse. In addition, effective 2024, Roth (after-tax dollar) emergency savings accounts linked to employer retirement savings can allow up to $2,500 of contributions per year. Funds can be used penalty- and tax-free for self-attested hardship situations.