As a father of two small children, I can attest to the fact that getting anything accomplished around the house is nearly impossible when the kids are arguing and fighting with each other. It’s usually over something trivial—TV or toys—but it takes time and attention away from all the other tasks of parenting and running a household. (Disclaimer—my kids are fairly well behaved, but kids nonetheless!)
The same can be said about Congress in Washington. It’s difficult to get anything done when the halls of D.C. are consumed with infighting. As most Americans would probably agree, we want our duly-elected representatives to focus on policy rather than play politics. In the final days of 2022, Congress was able to do just that and pass a $1.7 trillion omnibus spending bill to avoid a government shutdown.
As with most spending bills, the merits of how and where the government spends our tax dollars are up for debate. I’ll save that discussion for another time, though. Amid the 1,650-page bill, however, was one key piece of legislation that will impact—and ultimately benefit—people saving for retirement and to some extent those already in retirement.
The SECURE 2.0 Act of 2022 (named after its predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019) is designed to improve the state of retirement savings and retiree income in the United States.
The following highlights just some of the provisions in the law that could affect you and your retirement savings.
- Increased Age to Begin Required Minimum Distributions (RMDs). The 2019 SECURE Act raised the age at which retirement savers must begin taking required distributions from their traditional IRAs and most work-based retirement savings plans from 70 ½ to 72. SECURE 2.0 raises that age again to 73 beginning in 2023 and 75 in 2033.
- Reduction in the RMD Excise Tax. In the event that an IRA owner fails to take their full required minimum distribution (RMD) by the deadline, current law imposes a 50 percent tax penalty on the amount not taken. The new law reduces the tax to 25 percent in 2023.
- No RMDs from Roth 401(k) Accounts. The legislation eliminates the requirement for savers to take minimum distributions from the Roth savings portions of their 401(k) account. This brings Roth 401(k) savings in line with Roth IRAs.
- Higher Limits on Qualified Charitable Distributions (QCD). Current law allows IRA owners to distribute up to $100,000 annually in the form of Qualified Charitable Distributions. Beginning in 2024, the annual $100,000 amount will be indexed for inflation. QCDs are one retirement planning strategy that allows retirees to fulfill RMD requirements without having to report it as income.
- Higher Catch-up Contributions. Beginning in 2024, the IRA catch-up contribution limit will be indexed annually for inflation. Beginning in 2025, people ages 60 to 63 will be able to contribute an additional $10,000 to 401(k) and similar plans each year or $5,000 for SIMPLE IRA plans. For those making more than $145,000, all catch-up contributions will be after-tax Roth contributions.
- Employer Roth Matching Contributions. Currently, an employer’s matching contribution must go into a pre-tax account, even if the employee is making Roth contributions. The new law permits employer matching to be made as a Roth contribution. Although this provision takes effect immediately, employers will need time to amend their plans to include this feature.
- Emergency Savings Accounts. The legislation includes measures that permit employers to automatically enroll non-highly compensated workers into emergency savings accounts to set aside up to $2,500 (or a lower amount that an employer stipulates) in a Roth-type account. Savings above this limit and any employer matching contributions would go into the traditional retirement account.
- Matching Contributions for Qualified Student Loan Repayments. Em-ployers have the option to make matching contributions to a retirement account in the employee’s name for workers who are repaying qualified student loans.
- 529 Rollovers to Roth IRAs. Those with 529 saving plan accounts will be able to directly roll over up to $35,000 to a Roth IRA during the beneficiary’s lifetime, provided the 529 accounts have been held for at least 15 years. The rollover amounts would be subject to the annual Roth IRA contribution limits.
- New Exceptions to the 10 Percent Early Withdrawal Penalty. This provision adds several new exceptions to the early withdrawal penalty imposed on distributions from retirement accounts prior to age 59 ½. The new exceptions include an emergency personal expense, terminal illness, domestic abuse, payment for long-term care insurance premiums, and recovery from a federally declared disaster. The specific amounts, rules, and effective date differ for each exception.
- Saver’s Match. Beginning in 2027, the retirement savings tax credit for low-and moderate-income taxpayers is redesignated as a match that will generally be contributed directly into an individual’s retirement account. The match is allowed even if the taxpayer has no income tax obligation.
- Retirement Savings Lost and Found. This provision requires the U.S. Treasury to establish a searchable database within the next two years for lost 401(k) plan accounts.
- Small Business Tax Credits. Employers with up to 50 employees will receive a tax credit for 100 percent of start-up costs for new 401(k) plans up to $5,000 annually for the first three years.
These provisions represent just some of the significant changes brought about by SECURE 2.0. Although there is much more that could be done to improve retirement in America, this legislation is a huge step in the right direction.
Now if you’ll excuse me, I have to go check on the children.
Kevin Ihrke is a CERTIFIED FINANCIAL PLANNER™ professional with Investment Insights, LLC, located at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, LLC and Cambridge are not affiliated.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Comments and questions can be sent to kevin.ihrke@emailsri.com. These are the opinions of Kevin Ihrke and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as tax, legal, or individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results. Indices mentioned are unmanaged and cannot be invested in directly.