The SECURE 2.0 ACT – A Quick Summary

On December 29, 2022, the second of the SECURE Acts (or the SECURE Act 2.0) was signed into law.  Just like a good movie, there is nothing like a sequel! 
 
SECURE stands for Setting Every Community Up for Retirement Enhancement.  Just like every other enhancement bill from our good friends in Washington, it would be wise to see that you still have your wallet after its passage. 
 
Both Secure Acts seek to reform how Americans prepare for retirement while juggling current spending needs (i.e., sticking it to some taxpayers).  Since few Americans are financially prepared for retirement, this bill has a lot of heavy lifting to do.
 
Usually, these bill have such reassuring names but do very little to make your life better (my opinion only).  At first blush you will likely see the added burden both administratively and cost wise that Congress has forced on companies to give you the flexibility reflected below.
 
Let’s take a look at some of the key provisions that affect our average clients.
 
For Individual Savers:

• Auto-Enrollment Requirements: auto-enrollment will be required for all new retirement plans starting in 2025. Even with auto-enrollment, you can still opt out individually or as a plan based on a limited number of exceptions.
• Higher Catch-Up Contributions: the SECURE 2.0 Act has increased annual "catch-up" contribution in 2024-2025 for many retirement accounts (i.e., extra amounts allowed beyond the standard contribution limits); and significantly, tied future increases to inflation.
• An Expanded Contribution Window for Sole Proprietors starting in 2024: If you're a sole proprietor, you'll be able to establish a Solo 401(k) through the current year's Federal income tax filing date, and still fund it with prior year contributions.
• Potential Tax Error "Do Overs" starts in 2025: To err is human and but don’t do so on your retirement plan until now.  The SECURE 2.0 has directed the IRS to apply an existing Employer Plans Compliance Resolutions System (EPCRS) to employer-sponsored plans and to IRAs. The details are to be developed, but the intent is to set up a system in which "most inadvertent failures to comply with tax-qualification rules would be eligible for self-correction."

 
For Employer Plans:

There also are provisions to help employers offer effective retirement plan programs:
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• Better Retirement Plan Start-Up Incentives: Starting this year, small businesses can take retirement plan start-up credits to offset up to 100% of their plan start-up costs (versus a prior 50% cap). Businesses with no retirement plan can also apply for start-up credits if they join a Multiple Employer Plan (MEP) retroactive to 2020.
• A New "Starter 401(k)" Plan (Beginning in 2024): The Starter 401(k) provides small businesses that lack a 401(k) plan a simpler path to establishing one. Features will include streamlined regulatory and reporting requirements; auto-enrollment for all employees starting at 3% of their pay; a $6,000 annual contribution limit, rising with inflation; and a deferral-only structure, meaning the plan does NOT permit matching employer contributions.
• Expanded SIMPLE Plan Contributions: Under certain conditions, SECURE 2.0 allows for additional employer contributions to, and higher participant contribution limits for SIMPLE IRA plans starting in 2024.
• New Household Employee Plans: Starting this year, families can establish SEP IRA plans for their household employees, such as nannies or housekeepers.  Of course, this would also mean that such household employees would be required to be paid above the table.  In my experience, this is not something I have seen in a majority of cases.
• Small Perks (2023): Until now, employers were prohibited from offering even small incentives to encourage employees to step up their retirement savings. Now, de minimis perks are okay, such as a gift card when a participant increases their deferral amount.

 
Other Savings and Withdrawal Provisions:
 
It can be hard to save for your future retirement when current expenses loom large. We advise proceeding with caution before using retirement savings for any other purposes, but SECURE 2.0 does include several new provisions to help families strike a balance.

• Student Loan Payments Count as Elective Deferrals starting in 2024: If you're paying off student debt and trying to save for retirement, your student loan payments will qualify as elective deferrals in your company plan. This means, whether you contribute to your company retirement plan or you make student loan payments, your employer can use either to make matching contributions to your retirement account.
• Transferring 529 Plan Assets to a Roth IRA starting in 2024: This one is subject to a number of qualifying hurdles but SECURE 2.0 establishes a path for families to transfer up to $35,000 of untapped 529 college saving plan assets into the beneficiary's Roth IRA based on the annual Roth IRA contribution limits. With proper planning, this may help families "seed" their children's or grandchildren's retirement savings with their unspent college savings.
• Relaxed Emergency Plan Withdrawals starting in 2024: SECURE 2.0 relaxes the ability to take a modest emergency withdrawal out of your retirement plan. Essentially, as long as you self-certify that you need the money, you can take up to $1,000 in a calendar year, without incurring the usual 10% penalty for early withdrawal. Once you've taken an emergency withdrawal, there are several hurdles before you're eligible to take another one.
• Additional Exceptions to the 10% Retirement Plan Withdrawal Penalty (Varied): SECURE 2.0 has established new exceptions to the 10% penalty including if you're terminally ill or a domestic abuse victim, or if you use the assets to pay for long-term care insurance.
• Relaxed Emergency Loans from Retirement Plan:  Starting in 2023, if you end up living in a Federally declared disaster area, SECURE 2.0 also increases your ability to borrow up to 100% of your vested plan balance up to $100,000, with a more generous pay-back window.

 
All Things Roth:
 
Tax planning for your retirement savings is also important. To help with that, you can typically choose between two account types as you save for retirement: Traditional IRA or employer-sponsored plans, or Roth versions of the same.
 
Either way, your retirement savings grow tax-free while they're in your accounts. The main difference is whether you pay income taxes at the beginning or end of the process. For Roth accounts, you typically pay taxes up front,

funding the account with after-tax dollars. Traditional retirement accounts are typically funded with pre-tax dollars, and you pay taxes on withdrawals.
 
That's the intent, anyway. To fill in a few missing links, the SECURE 2.0 Act:

• Eliminates Required Minimum Distributions for employer-sponsored Roth accounts, such as Roth 401(k)s and Roth 403(b)s, to align with individual Roth practices (2024)
• Establishes Roth versions of SEP and SIMPLE IRAs starting in 2023.  However, I looked for these with our custodian and others and they are so new, I doubt you see this option until later in the year.
• Allows employers to make contributions to traditional and Roth retirement accounts starting this year.

 
There's one thing that's not changed, although there's been talk that it might: There are still no restrictions on "backdoor Roth conversions" and similar strategies some families have been using to boost their tax-efficient retirement resources.
 
New RMD Provisions:
 
Not surprisingly, the government would prefer you eventually start spending your tax-sheltered retirement savings, or at least pay taxes on the income. That's why there are rules regarding when you must start taking Required Minimum Distributions (RMDs) out of your retirement accounts. That said, both SECURE Acts have relaxed and refined some of those RMD rules.

• Extended RMD Dates (2023): the original SECURE Act postponed when you must start taking taxable RMDs from your retirement account-from 70 ½ to 72. The SECURE 2.0 Act extends that deadline further. If you were born between 1951-1959, you can now wait until age 73. If you were born after that, it's age 75.
• Reduced Penalties (2023): If you fail to take an RMD, the penalty is reduced from a whopping 50% of the distribution to a slightly more palatable 25%. Also, the penalty may be further reduced to 10% if you fix the error within a prescribed correction window.
• Enhanced RMDs for Surviving Spouses (2024): If you are a widow or widower inheriting your spouse's retirement plan assets, you will be able to elect to determine your RMD date as if you were your spouse. This provision can work well if your spouse was younger than you. 
• Qualified Charitable Distributions (QCDs) limit tied to inflation: QCDs out of your retirement accounts beginning at age 70 ½, and the income is still excluded from your taxable adjusted gross income, as well as from Social Security tax and Medicare surcharge calculations. Plus, beginning in 2024, the maximum QCD you can make (currently $100,000) will increase with inflation. 

 
Next Steps:
 
How else can we help you incorporate SECURE 2.0 Act updates into your personal financial plans?