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10 Changes Brought About by the SECURE Act 2.0

10 Changes Brought About by the SECURE Act 2.0

by Drew Overton | January 18, 2023 | Financial Planning

We hope you all had a wonderful Christmas as well as a great New Year’s. We wanted to provide information regarding the new law that was passed on Thursday, December 30th, 2022, the SECURE Act 2.0. This $1.7 trillion omnibus spending package contains various pieces of retirement-related reform. While most of the changes are not as significant as the original SECURE Act (2019) which limited most inherited IRA owners to a 10-year distribution window, instead of having the ability to stretch distributions throughout their lifetime. That said, this bill still contains many changes that are worth noting. We’ve gathered a list of our top ten changes. 

  1. Beginning in 2023, required minimum distributions will begin for people attaining age 73. 
  2. Roth 401Ks RMDs are no longer required for Roth accounts in qualified employer plans.
  3. Matching contributions or non-elective contributions can now be designated to a Roth account. 
  4. Beginning in 2024 catchup contributions for 401(k)s, 403(b)s, and governmental 457(b) plans are required to use a Roth option for catch-up contributions if the employee makes over a certain amount. 
  5. Beginning in 2024, 529 account owners will have limited ability to transfer 529 assets into a Roth IRA. 
  6. Surviving spouse beneficiaries of IRAs can now elect to be treated as the deceased spouse. 
  7. Beginning in 2025 plan catch-up contributions for participants in their early 60s. 
  8. 10% penalty exceptions for retirement accounts. 
  9. Expands the amount of people that can open an ABLE account (starting in 2026).
  10. Reduction of the 50% penalty for an RMD shortfall. 

This list only scratches the surface of the SECURE Act 2.0. Provided below you can read a further explanation of the ten changes we have highlighted, as we continue to monitor different sources to understand the intent of Congress for certain parts of this bill as well as how the implementation will be rolled out for other segments. If you believe that any of these changes may impact you directly, please give us a call if you have any questions. 

  1. Beginning in 2023, required minimum distributions will begin for people attaining age 73. Previously, the required beginning date was 70 1/2, which then switched to 72 (original SECURE Act), and that has now changed to 73. Please note that if you have already started taking required minimum distributions this will not impact you. The only people that are impacted by this change are individuals who turn 72 in 2023 or later. If you turn 72 in 2023, you will no longer have to take your first RMD this year. Instead, your first RMD will be in 2024, at age 73. Additionally, in 2033, the age at which you must take your RMD will change again from 73 to 75.
  2. Before SECURE Act 2.0 was enacted, Roth 401Ks were subject to required minimum distributions, even though Roth IRAs are not. Because of that, the general recommendation has been to roll any Roth 401K balance over to a Roth IRA. Beginning in 2024, RMDs are no longer required for Roth accounts in qualified employer plans.
  3. Another change brought about by SECURE Act 2.0 is that any matching contributions or non-elective contributions can now be designated to a Roth account. These contributions will still be deducted by the employer but would not be deductible for the employee. These contributions must be non-forfeitable. This change is effective upon enactment. 
  4. Starting in 2024, catchup contributions for 401(k)s, 403(b)s, and governmental 457(b) plans are required to use a Roth option for catch-up contributions if the employee makes over a certain amount. This change will limit the ability for high income earners to deduct the catch-up contributions in the current year, which are often their highest income earning years. This change is most likely brought about to help fund other initiatives within the bill.
  5. Another change that has made headlines recently is the limited ability to transfer 529 assets into a Roth IRA. This change takes effect in 2024 but has several conditions that must be met. Some of these conditions include: the Roth IRA that receives the funds must be in the name of the 529 beneficiary, the 529 plan must have been opened for at least 15 years, any money moved from the 529 plan into the Roth IRA must have been in the plan for a minimum of five years, the maximum amount that can be moved in an individual’s lifetime is $35,000, the annual limit for the 529 to Roth IRA transfer is the same as the IRA contribution limit (the 529-to-Roth IRA transfer counts against your IRA contributions for the year). These are just some of the major conditions that are included in this rule.
  6. One change that would benefit most people is that surviving spouse beneficiaries can now elect to be treated as the deceased spouse. More specifically, when a surviving spouse inherits from their deceased spouse, they have a list of options they can choose from as to how the account is treated. Starting in 2024, SECURE Act 2.0 adds another option to the list. The surviving spouse will have the ability to elect to be treated as the deceased spouse. More specifically, RMDs will begin when the deceased spouse would have turned RMD age, the Uniform Lifetime Table will be used instead of the Single Lifetime Table, and if the surviving spouse dies before RMDs begin, their beneficiaries will be treated as the original beneficiaries (This may allow certain Eligible Designated Beneficiaries to utilize the ‘stretch’ provision).
  7. Another change involves plan catch-up contributions for participants in their early 60s. This rule will take effect in 2025. The catch-up contribution limit increases for certain plan participants who are ages 60, 61, 62, and 63. The increase will be the greater of $10,000 or 150% of their regular catch-up contribution amount for those plans in 2024. This change will help soon-to-be retirees backload their retirement savings. 
  8. Another big change brought about by the new SECURE Act 2.0 is an expansion of the list of 10% penalty exceptions for retirement accounts. Some of these additional 10% penalty exceptions include, but are not limited to: 
    • Age 50 Exception Expanded To Include Private-Sector Firefighters
    • Age 50 Exception Expanded To Include State And Local Corrections Officers
    • Age 50 Exception Expanded To Include Qualifying Workers With 25 Or More Years Of Service For An Employer
    • Permanent Reinstatement Of Smaller Qualified Disaster Distributions ($22,000 limit) – can spread income over 3 years. Distributions must be repaid within 3 years.
    • Creation of Exceptions For Individuals With A Terminal Illness – “terminally ill” in this case is defined as 84 months (7 years). Distributions must be repaid within 3 years. 
    • Creation Of Exception For Victims Of Domestic Abuse
  9. SECURE Act 2.0 also expands the amount of people that can open an ABLE account. Starting in 2026, ABLE accounts can be established for people who have become disabled before the age of 46. For 2023 – 2025, the age requirement remains at 26.
  10. While there are many more changes included in this new bill, the last change that reaches our top 10 is the reduction of the 50% penalty for an RMD shortfall. Beginning in 2023, the 50% penalty applied to the balance of any RMDs that have not been distributed before the due date will be reduced to 25%. However, if the remaining required minimum distribution is distributed during the ‘Correction Window’, the penalty is further reduced to 10%.