On December 29, 2022, President Biden signed the Consolidated Appropriations Act into law. This legislation, referred to as the SECURE 2.0 Act of 2022, implemented multiple changes with respect to retirement plans and accounts. Below are a few highlights from the SECURE 2.0 Act that you should consider when planning for retirement:

Higher Age for Required Minimum Distributions (RMDs)

The age that individuals must begin taking RMDs from their retirement accounts has been increased from 72 to 73 starting in 2023. That threshold age further increases to 75 starting in 2033. This delay gives retirees an extra year (to three years) to allow their savings to grow and compounding interest to accumulate before withdrawals begin.

No More RMDs for Roth 401(k)s

Under the new law, Roth 401(k) accounts will no longer have mandatory distributions at any age, beginning in 2024. This change will allow Roth 401(k) accounts to continue accumulating tax-free earnings over time without any worries of an RMD requirement. Individuals will have more flexibility in how they manage their retirement savings, which can be beneficial if they plan on leaving their savings behind as part of an estate plan or legacy strategy.

Reduced Penalties for RMD Mistakes

The SECURE 2.0 Act also offers leniency for those who make mistakes when calculating their RMDs or miss required distributions altogether. The current 50% penalty is reduced to 25%—and even 10% when a missed RMD is corrected within two years (subject to certain limitations). While this change does not eliminate all potential penalties, it does provide a slight reprieve from the harsh penalty structure previously in place.

Increased Catch-Up Contributions

Those individuals currently participating in a 401(k) account can contribute an additional $7,500 per year in their account. Beginning in 2025, this amount will increase to $10,000 for participants aged 60 to 63. Additionally, starting January 1, 2024, any catch-up contributions made by individuals earning more than $145,000 must make such contributions on a Roth basis.

Transfers from 529 Plans to Roth IRAs

The new law also enables individuals to directly transfer funds (up to $35,000) from 529 college savings plans into Roth IRAs. Such transfers are subject to certain stipulations, including: the transferred funds must have been in the 529 plan for at least five (5) years, and the 529 plan must have been maintained for at least 15 years.

Increased Qualified Charitable Distributions (QCDs)

Additionally, under previous law, QCDs up to $100,000 per year were allowed from IRAs. Starting in 2024, the annual QCD limit will be indexed for inflation.

Increased Small Business Startup Credit

The SECURE 2.0 Act also includes provisions to increase the startup credit for employers (with up to 50 employees). In fact, the startup credit will increase from 50% to 100%, starting in tax years beginning after December 31, 2022.

Matching Student Loan Payments

Further, the SECURE 2.0 Act allows employers to make matching contributions to their employees’ retirement accounts when their employees make a qualifying student loan payment. This is a unique opportunity to allow employees to both pay down their student loan debt and save for retirement through employer contributions.

No Penalty for Emergency Expense Withdrawals

The new law also allows individuals to avoid the early withdrawal tax penalty (10%) for certain emergency expense withdrawals. The limitation is $1,000 per year, and the distributed amount can be repaid within three (3) years. Additional emergency withdrawals cannot be made during the three-year period unless the original withdrawal is paid back in full. This change is effective for distributions occurring on or after January 1, 2024.

Automatic Enrollment for 401(k)s and 403(b)s

Finally, the SECURE 2.0 Act requires an automatic enrollment feature for new 401(k)s and 403(b) plans. Specifically, the automatic enrollment must be at least 3%, but not more than 10%. Additionally, the percentage must increase 1% annually up to 10%, but not more than 15%. These changes are effective for plan years beginning after December 31, 2024.

Conclusion

The SECURE 2.0 Act of 2022 incorporated multiple changes to existing laws related to retirement accounts. The non-exhaustive list of changes above underscores the need for individuals to review their retirement accounts and strategies. The nature of the changes, such as the increased ages for RMDs and the increased catch-up contribution amounts, and the effective timing of the changes are important considerations when building out your financial plan. Working with a financial advisor that understands SECURE 2.0 and how it applies to your situation is essential.

Make an appointment for a free consultation to speak with the Provident Financial Planning team of Certified Financial Planner™ and CPA/JD tax experts, so we can advise you on how best to plan for your financial future today.

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In His Name,

Zachary J. Montgomery, JD, CPA, CFE

zachary@providentfp.com