SECURE Act 2.0: How Will the New Provisions Impact Your Financial Planning?

MMAs part of the 2023 fiscal year federal spending bill, the changes for SECURE Act 2.0 for 2024 is increasing the maximum amount you can make in catch-up contributions each year based on your retirement account. Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 to deliver expanded benefits and flexibility for those closer to retirement and employees building their tax-favored savings.

Signed into law four years ago, the original SECURE Act brought a wide range of changes to the retirement planning landscape, from the death of the ‘stretch’ IRA to raising the age for Required Minimum Distributions (RMDs) to 72. There are provisions in this new law that have more of a total significant impact on working professionals and retirees than in the original SECURE Act legislation.

What is SECURE Act 2.0?

The SECURE Act 2.0 requires most companies to enroll eligible employees in their retirement plans automatically. Starting in 2025, employers starting a new 401(k) or 403(b) plan must automatically enroll eligible employees at a default contribution rate between 3% and 10% of their salary, unless an alternative rate is selected by the employee.₁

SECURE Act 2.0 boosts opportunities for those nearing retirement to fund tax-advantaged accounts and make charitable donations by:

• Delaying the RMD starting age to 73 as of January 1st, 2023, and then to 75 in 2033. No retirement account owners will start RMDs in 2023 or 2033 (due to age), which means that anyone currently subject to RMDs under the previous age 70½ and 72 rules is not affected and must continue to follow their existing RMD schedule.
  • Planning Insight: Those who do not need the RMD income to meet cash flow needs have greater flexibility. There is an opportunity for up to another few years of tax-efficient Roth conversions. Delaying retirement withdrawals will likely reduce Medicare Parts B and D surcharges when larger RMDs would push retirees into a higher income threshold. More time to defer RMDs also enables more tax-free growth and provides the option for distributions to be made when you are in a lower tax bracket.
• Permitting higher “catch-up” contributions for workplace retirement plans. Under current law, once you reach age 50, you can fund your 401(k), 403(b), 457(b), or Thrift Savings Plan (TSP) with an additional sum, indexed to inflation, above the regular deferral limit.

  For example, in 2024, you can defer an extra $7,500 on top of the regular $23,000 of deferrals. Starting in 2025, this catch-up limit for employees between the ages of 60 and 63 during the year is increased to the greater of $10,000 or 1½ times of the 2024 catch-up contribution amount.

  • Planning Insight: Increasing the catch-up contribution limits give individuals the invaluable opportunity to make even larger contributions as they approach retirement. With a 2024 catch-up limit of $8,000, a 61-year-old employee would be allowed to make a catch- up contribution of $12,000. Higher catch-ups will also be available for SIMPLE IRA participants.
• Adjusting the Traditional IRA/Roth IRA catch-up contribution amount for those aged 50 and older for inflation for tax years starting in 2024.
• Indexing 2023 Maximum Annual Qualified Charitable Distribution (QCD) amount of $100,000 for inflation, starting in 2024. Currently, individuals age 70½ or older may utilize QCDs to donate up to an inflation-adjusted $105,000 every year.

  For individuals aged 73 or older, a significant benefit of using this QCD strategy is that you can fulfill your IRA RMD by directly transferring up to $100,000 of the RMD to charity from an IRA, paying no tax on what would have been a distribution taxed as ordinary income.

  Also, starting in 2023, individuals may leverage a one-time $50,000 election to fund a split-interest charitable giving vehicle, such as a Charitable Remainder UniTrust (CRUT), Charitable Remainder Annuity Trust (CRAT) or Charitable Gift Annuity (CGA), with an IRA QCD. The 2024 contribution is limited to an inflation-adjusted $53,000, and income interest must be payable to the account owner or spouse.

  • Planning Insight: Increasing QCDs for those taking RMDs may lower your adjusted gross income, which can possibly help you avoid Medicare premium increases from getting pushed into a higher tax bracket.

What Does SECURE Act 2.0 Mean for Employees?

SECURE Act 2.0 makes it easier to ramp up Roth-related savings earlier for working professionals by:

• Providing opportunity for employees to elect 401(k), 403(b), 457(b), or TSP employer matching and nonelective contributions to be made in Roth (after-tax) accounts. Up to now, employer plan contributions have always been made on a pre-tax basis. This new provision does not apply to profit-sharing contributions for 401(k) plans. Also, effective in 2023, SEP and SIMPLE IRAs permit Roth contributions.
  • Planning Insight: Anyone choosing this option will have the applicable Roth amount included in gross income. Be mindful that the current availability of these contributions is impacted by employer adoption, IRS guidance on the formal “election,” as well as custodian updates to documents and procedures.
• Mandating the Roth option for high wage earners for 401(k), 403(b), 457(b), or TSP catch-up contributions, starting eventually in 2026 (The Roth catch-up rule was originally supposed to start in 2024. Due to problems with implementing Roth catch-up contributions, the IRS announced that Roth catch-up contributions won’t be required until 2026). This new ‘Rothification’ rule applies to workplace plan (non-SIMPLE IRA) participants aged 50 and older with wages over $145,000, indexed for inflation, in the prior calendar year.₂

Those who are self-employed may continue to make catch-up contributions on a pre-tax basis, even if income from self-employment is higher than $145,000. The new catch-up contribution requirement will not apply if the employer plan does not have a Roth option.

• Eliminating RMDs from Roth 401(k), 403(b), 457(b), or TSP plans, beginning in 2024.
• Directly transferring unused college 529 savings plans to Roth IRAs, starting in 2024. This key provision permits beneficiaries to roll over up to an aggregate lifetime limit of $35,000 in long-term qualified tuition programs into the name of the 529 plan beneficiary’s Roth IRA, without any tax penalties. Notably, high income earners, who have been held back from establishing a Roth IRA due to income limits, can fund a Roth by leveraging a 529 plan transfer of leftover funds.

There are several restrictions, including the following: 1) The 529 plan must have been in place for over 15 years, 2) the yearly rollovers cannot exceed the annual Roth IRA contribution limit, and 3) the beneficiary must have earned income.

• • Planning Insight: This new rule enhances flexibility for college savings for those who are reluctant to maximize funding to tax-advantaged 529 plans due to fear of overfunding. There are possible ordinary income tax and 10% tax penalty ramifications upon withdrawing 529 earnings for non-qualified education expenses. Some of these funds earmarked for educational purposes can now potentially be repurposed as retirement savings, especially if a child was fortunate to get a scholarship or decides not to go to college.

Additional Highlights of SECURE 2.0 Include:

• Student Loan “Match” – Student Employers may match payments employees make on student loans and deposit the funds in their 401(k), 403(b), 457(b), and TSP retirement plans, starting in 2024. This new provision is optional.
• Automatic Enrollment – Employers with defined contribution plans are required to automatically enroll new, eligible employees at a 3% contribution rate and increase the contribution 1% annually until it reaches at least 10% (but no more than 15%) of compensation. Employees may choose to opt out of the plan.
• Emergency Savings Accounts. Another new option for employers, starting in 2024, is to offer non-highly compensated employees a special sub-account within the plan for emergency savings contributions made on a Roth basis. Lifetime employee contributions to these emergency savings accounts, which must be held in safe investments, may not exceed $2,500. There are relaxed distribution rules, including no 10% penalty for those under age 59½.
• New Post-Death Option for Surviving Spouse Beneficiary of Retirement Accounts – Beginning in 2024, sole-surviving spouse beneficiaries can elect to delay RMDs longer until the deceased spouse would have reached age 73 (2023) / age 75 (2033). This new post-death option is beneficial for surviving spouses who inherit retirement accounts from a younger spouse. Once RMDs are necessary, surviving spouses can “stretch” RMDs using Uniform Lifetime Table (for account owners), which will produce lower RMDs than if they had made a spousal rollover or remained beneficiary of the account.
• Missed RMD Penalty Changes. New law, effective in 2023, reduces the penalty for missed RMDs from 50% to 25%. This penalty is further reduced to 10% if fixed in a timely manner during the “Correction Window.”
• Expanded exceptions to the 10% early distribution penalty. The new rule authorizes additional ways you can access retirement savings prior to reaching age 59½ without a 10% penalty. Beginning in 2023, natural disaster victims and those who are terminally ill will be able to access their retirement accounts early without penalty.

Get in touch with a Team Hewins advisor to discuss how you can optimally leverage the new financial planning opportunities from SECURE Act 2.0.

1. August, Hillary E. “SECURE 2.0 – Key Changes for Retirement Plans.” The American Bar Association, 26 April, 2023,  https://www.americanbar.org/groups/labor_law/publications/ebc_news_archive/issue-spring-2023/secure-20-keychanges/.

2. IRS Announces Administrative Transition Period for New Roth Catch up Requirement; Catch-up Contributions Still Permitted After 2023 | Internal Revenue Service. https://www.irs.gov/newsroom/irs-announces-administrative-transition-period-for-new-roth-catch-up-requirement-catch-up-contributions-still-permitted-after-2023#:~:text=WASHINGTON%20%E2%80%94%20Today%2C%20the%20Internal%20Revenue,as%20after%2Dtax%20Roth%20contributions.

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