Inside the massive, $1.7 trillion omnibus spending legislation passed by Congress and signed by President Biden in late December was the much-anticipated retirement bill dubbed the SECURE 2.0 Act of 2022. This new bill arrived nearly three years to the day after its predecessor, the similarly sweeping Setting Every Community Up for Retirement Enhancement Act (SECURE Act) passed in 2019. As with the original SECURE Act, the Secure 2.0 Act is designed to improve the current and future state of retiree income in the United States. The following is a summary of some of the most notable changes.

Required Minimum Distribution (RMD) Changes

• Later age for RMDs The 2019 SECURE Act raised the age at which retirement savers must begin taking distributions from their traditional IRAs and most work-based retirement savings plans to 72. SECURE 2.0 raises that age again to 73 beginning in 2023 and 75 in 2033.

• Reduction in the RMD excise tax Current law requires those who fail to take their full RMD by the deadline to pay a tax of 50% of the amount not taken. The new law reduces that tax amount to 25% in 2023; the tax is further reduced to 10% if account holders take the full required amount and report tax by the end of the second year after it was due and before IRS demands payment.

Roth-Related Changes (click here for a visual summary)

• No RMDs from Roth 401(k) accounts The legislation eliminates the requirement for savers to take minimum distributions from their work-based plan Roth accounts, bringing Roth 401(k)s and similar employer plans in line with Roth IRAs.

• Roth matching contributions The new law permits employer matches to be made to Roth accounts. Currently, employer matches must go in an employee's pre-tax account. This provision takes effect immediately; however, it may take time for employers to amend their plans.

• Roth catch-up contributions Beginning in 2024, all retirement plan catch-up contributions for those making more than $145,000 will be after-tax (Roth contributions).

• 529 rollovers to Roth IRAs People will be able to directly roll over up to $35,000 from 529 accounts to Roth IRAs for the same beneficiary, provided the 529 accounts have been held for at least 15 years. Annually, the rollover amounts would be subject to Roth IRA contribution limits.

Qualified Charitable Contribution (QCD) Changes

• Higher limits on QCDs from IRAs The amount currently eligible for a qualified charitable distribution from an IRA ($100,000) will be indexed for inflation.

• Looser restrictions on QCDs Beginning in 2023, investors will be able to make a one-time charitable distribution of up to $50,000 from an IRA to a charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity.

Retirement Account Contribution Changes

• Higher catch-up contributions The IRA catch-up contribution limit will be indexed annually for inflation, similar to work-sponsored catch-up contributions. Also, starting in 2025, people age 60 to 63 will be able to contribute an additional minimum of $10,000 annually for 401(k) and similar plans (and at least $5,000 for SIMPLE plans).

• Matching contributions for qualified student loan repayments Employers may help workers repaying qualified student loans simultaneously save for retirement by investing matching contributions in a retirement account in the employee's name.

• Automatic enrollment and automatic saving increases Beginning in 2025, the Act requires most new work-sponsored plans to automatically enroll employees with contribution levels between 3% and 10% of income and increase their savings rates by 1% a year until they reach at least 10% (but not more than 15%) of income. Workers will be able to opt out of the programs.

Miscellaneous Changes

• New exceptions to the 10% early-withdrawal penalty The law provides for several new exceptions to the early-withdrawal penalty, including an emergency personal expense, terminal illness, domestic abuse, to pay long-term care insurance premiums, and to recover from a federally declared disaster. Amounts, rules, and effective dates differ for each circumstance.

• Emergency savings accounts The legislation includes permitting employers to automatically enroll non-highly compensated workers into emergency savings accounts to set aside up to $2,500 in a Roth-type account.

• Saver's match Low- and moderate-income savers currently benefit from a tax credit of up to $1,000 ($2,000 for married couples filing jointly) for saving in a retirement account. Beginning in 2027, the credit is re-designated as a match that will generally be contributed directly into an individual's retirement account and is allowed even if taxpayers have no income tax obligation.

• Part-time employees and retirement plans The SECURE Act of 2019 required employers to allow workers who clocked at least 500 hours for three consecutive years to participate in a retirement savings plan. Beginning in 2025, the new law reduces the second component of that service requirement to just two years.

• Lifetime income products in retirement plans The amount that plan participants can use to purchase qualified longevity annuity contracts (QLAC) will increase to $200,000. The current law caps that amount at 25% of the value of the retirement accounts or $145,000, whichever is less.

We are actively assessing the impact of the various provisions from this latest bill and updating our planning strategies and recommendations accordingly. Clients, you can expect to hear more from your planning team about the impact on your personal situation, but please don’t hesitate to reach out sooner if you have any questions.