On December 23, 2022, Congress passed the Consolidated Appropriations Act, 2023 (CAA), a 4,155 page, $1.7 trillion-dollar year-end “omnibus” spending bill. While the CAA includes numerous spending provisions across all areas of policy, it also includes significant retirement reforms.
Summary of SECURE 2.0
The CAA includes Division T, which is bipartisan retirement legislation commonly known as “SECURE 2.0” (building on the Setting Every Community Up for Retirement Enhancement Act of 2019). SECURE 2.0 contains more than 80 provisions, not all of which will be covered here. Below are the most notable changes we think you should be aware of:
- Delayed Age for Required Minimum Distributions (RMDs): Increases the required minimum distribution age to 73 starting on January 1, 2023, and increases the age further to 75 starting on January 1, 2033.
- No More RMDs for Roth 401(k)s: Previously, all 401(k) plan sources (including Roth) had to take RMDs. This was an oversight, as typically Roth funds don’t require distributions, so Congress acted to remove RMDs from Roth sources in a 401(k).
- Roth sources are available to other types of retirement accounts, like SIMPLE IRAs and SEP IRAs. Talk to your wealth manager or tax professional to see what makes sense for you.
- Leniency for RMD Mistakes: They’ve reduced the penalty for a missed RMD from 50% to 25%, and if it’s corrected within the “correction window,” (i.e., before the IRS notices), then the penalty is only 10%. As a Creative Planning client, you shouldn’t have to worry about this, as you’ll have our team coaching you about when to take your RMDs.
- 529 to Roth IRA Transfer: Effective in 2024, if you have an unused balance in a 529 plan, you can transfer those funds to your child’s Roth IRA tax-free. The most you can transfer is $35,000 over a lifetime. Keep in mind that these transfers reduce the amount of your child’s regular contributions, and they must be eligible to make contributions to a Roth IRA. The 529 plan must have been maintained for at least 15 years, and the only funds that are eligible for transfer must have been in the 529 plan for at least five years.
- New Spousal Rules for IRA: Starting in 2024, new spousal rules for inheriting IRAs go into effect. Spouses may elect to be treated (from the IRS’ perspective) as the deceased spouse instead of rolling the assets into their own IRA. As a result, the RMDs from the account would be based on the deceased spouse’s age and not the surviving spouse. If a younger spouse passes away, the older spouse will have more options about how they’ll inherit their spouse’s retirement accounts, and they can potentially delay taking RMDs.
- New Future Limit for Qualified Charitable Distributions (QCDs): For years, the maximum annual QCD amount was limited to $100,000. Beginning in 2024, the QCD limit will be linked to inflation.
- New Retirement Savings Options for Household Employees: Effective in 2023, you can create SEP IRAs for your household employees.
- Mandatory Auto Enrollment/Escalation: Requires all new 401(k) and 403(b) plans to automatically enroll participants at least 3% but not more than 10%, with automatic increases of 1% until it reaches 10% but not more than 15%. Effective for plan years beginning after December 31, 2024.
- Small Business Startup Credit: Increases the startup credit from 50% to 100% for employers with up to 50 employees. Effective for taxable years beginning after December 31, 2022.
- Saver’s Match: Modifies the existing Saver’s Credit with respect to IRA and retirement plan contributions by changing it from a credit paid in cash as part of a tax refund to a government matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. Effective for taxable years beginning after December 31, 2026.
- Catch-Up Limit: Increases these limits to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025. Effective for taxable years beginning after December 31, 2024.
- Matching Student Loan Payments: Allows employees to receive matching contributions by reason of repaying their student loans. Effective for contributions made for plan years beginning after December 31, 2023.
- Emergency Expense Withdrawals: Provides an exception to the early withdrawal tax penalty for certain distributions used for unforeseeable emergency expenses or immediate financial needs relating to personal or family emergency expenses. One distribution per year of up to $1,000 is allowed and can be paid back to the plan within three years. Effective for distributions made after December 31, 2023.
- Automatic Portability: Permits a retirement plan service provider to provide employer plans with automatic portability services of a participant’s default IRA (established in connection with a distribution from a former employer’s plan) into the participant’s new employer’s retirement plan. Effective for transactions occurring on or after the date that is 12 months after the date of enactment of the CAA.
- Starter 401(k) Plans: Permits an employer that does not sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan) defaulting employee deferrals at 3%-15%. The limit on annual deferrals would be the same as the IRA contribution limit. Effective for plan years beginning after December 31, 2023.
- Part-Time Worker Eligibility: Reduces the dual eligibility requirement under which an employee must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service (where the employee completes at least 500 hours of service) to two years. Effective for plan years beginning after December 31, 2024.
- Emergency Savings Accounts: Provides employers the option to offer to their non-highly compensated employees pension-linked emergency savings accounts with contributions made on a Roth-like basis. The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals.
- Retirement Savings Lost and Found: Creates a national online searchable lost and found database for retirement plans at the Department of Labor (DOL), allowing participants to search for the contact information of their plan administrator. Directs the creation of the database no later than two years after the date of enactment of the CAA.
- Increased Dollar Limit for Mandatory Distributions: Increases the mandatory distribution limit from $5,000 to $7,000. Effective for distributions made after December 31, 2023.
- Self-Certification of Hardships: Permits employees to self-certify that they have had an event that constitutes a hardship for the purposes of taking a hardship withdrawal. Effective for plan years beginning after the date of enactment of the CAA.
- Penalty-Free Withdrawal for Domestic Abuse: Allows retirement plans to permit participants to self-certify that they experienced domestic abuse to withdraw the lesser of $10,000 or 50% of the participant’s account and avoid the 10% tax on early distributions. Effective for distributions made after December 31, 2023.
- Requires Catch-Up Contributions to Be Roth: The cost of SECURE 2.0 will be offset by requiring that catch-up contributions be designated Roth contributions. This provision will apply to eligible participants whose wages for the preceding calendar year exceed $145,000. Effective for taxable years beginning after December 31, 2023.
If you have any questions regarding SECURE 2.0 and what it means for your personal situation, please don’t hesitate to reach out to your Creative Planning Wealth Manager.