SECURE Act 2.0 is Law: How Will it Impact Your Retirement Portfolio?
Estimated reading time: 9 minutes
At the end of 2022, President Biden signed the legislation containing the SECURE Act 2.0 into law. This legislation was built on the SECURE Act of 2019, intended to broaden and increase opportunities for retirement savings.
Whether you have a self-directed IRA (SDIRA), another type of retirement account, or even no retirement account yet, changes in the SECURE Act 2.0 will likely affect your retirement strategy.
Below is a breakdown of some of the provisions in the SECURE Act 2.0. We’ll focus on the changes that will affect IRAs and employer-sponsored plans like Individual 401(k)s, SEP, and SIMPLE plans. You can learn more about all of the provisions in this legislation here.
- Required minimum distribution (RMD) age increases from 72 to 73
- Catch-up contribution limits will be increased for certain plans
- Catch-up contributions for IRAs will be indexed for inflation
- 401(k) eligibility requirements for part-time employees are lowered
- Reduced penalties for missed RMDs
SECURE Act 2.0 Provisions Summary
RMD age increases from age 72 to 73
Individuals turning age 72 in 2023 will have an extra year to start taking RMDs. As of 2023, the new age for RMDs will be age 73.
Important update for 72 and 73 year-old IRA holders: Many IRA holders who turned 72 in 2023 still took an RMD, believing that it was required. In July 2023, the IRS published Notice 2023-54, allowing these IRA holders who took an unnecessary RMD to roll the funds back into their IRA without penalty.
If you turned 72 in 2023 and took an RMD between January 1, 2023, and July 31, 2023, because you didn’t realize the RMD age had gone up, you have until September 30, 2023, to roll the funds back into your account. This rollover is permitted even if you completed a rollover within the last 12 months. However, it does prevent you from completing another rollover in the next 12 months.
Catch-up contributions increase for individuals aged 60-63 for 401(k) and SIMPLE plan participants
Catch-up contributions are additional contributions allowed for individuals 50 and over. This new provision creates additional contribution opportunities for individuals aged 60-63 to the greater of $10,000 or 50% more than the regular catch-up amount after 2024.
Potential increases in IRA catch-up contributions
Currently, IRA annual catch-up contributions for individuals aged 50 and over are fixed at $1,000. This provision will allow increases to be adjusted based on cost-of-living adjustments (COLAs). In the event of an increase in COLA, catch-up contributions will increase as well. This potential increase will take effect in 2024.
Reduction of the excess accumulation penalty (RMD failure) from 50% to 25%
Under previous law, individuals who failed to distribute their annual RMD were subject to a 50% penalty calculated based on the amount the individual failed to distribute.
Thanks to the SECURE Act 2.0, this 50% penalty will now be reduced to 25%. In addition, if the failure to distribute is corrected (distributed) by the end of “the earlier of the date the IRS discovers the issue or December 31 of the following year, the penalty will be reduced to 10%." This change is effective immediately.
The DOL national retirement plan lost and found
Many individuals who have terminated employment lose track of their retirement funds. Sometimes these accounts get rolled over to an IRA custodian the previous employer selected, but participants are often unaware where their funds end up. This legislation institutes a lost and found mechanism designed to help ex-participants find their missing retirement funds.
This database must be created no later than the end of 2024.
Expanding the EPCRS (Employee Plans Compliance Resolution System) to include inadvertent IRA errors
Previously, there were no correction methods for some transaction errors involving IRAs. This change, effective 2023, will expand the current compliance resolution system to identify common errors and provide a mechanism for correction. This will help investors find and correct errors and avoid losing the IRA’s tax-advantaged status due to unintentional mistakes.
Expansion of Qualified Charitable Distributions (QCDs) rules
Under previous law, individuals 70½ or older were able to use a QCD to donate up to $100,000 to qualified charities directly from an IRA. With the SECURE Act, the annual QCD limit of $100,000 will be indexed for inflation, effective for tax years after 2023.
It also includes a one-time election for a QCD to fund one of the following: a charitable remainder unitrust, a charitable remainder annuity trust or a charitable gift annuity. The limitation to fund one of these is $50,000, also indexed for inflation starting in 2024.
Defines repayment of qualified birth and adoption expense distributions to three years
Currently, individuals may take a penalty-free distribution to pay for qualified birth and adoption expenses. If the adoption does not go through, this new provision will allow for the distributed amount(s) to be repaid for up to 3 years. This provision is effective immediately and applies retroactively to distributions prior to the enactment of the legislation.
Additional exemption to the 10% penalty for the reason of domestic abuse
If an individual can self-certify that they have been the victim of domestic abuse, they can take a penalty-free distribution from their retirement funds. The maximum amount allowed is the lesser of $10,000 or 50% of the individual's vested balance. This provision will go into effect in 2024.
Changes the effect of RMDs and excess contributions on IRAs and creates a new beginning date for statute of limitations for violations
Under the previous law, when an individual had an excess contribution or missed an RMD, the statute of limitations would begin when the violation was found. This means that an individual could be liable for all penalties accrued between when the violation occurred and when it was discovered.
Under the new law, the statute of limitations begins the year the violation occurred, regardless of when it is discovered. This means that if an individual misses an RMD and three or more years have passed since the violation, it is absolved. The same applies for excess contributions, except the statute extends to six years. This provision is effective immediately.
Tax treatment of an IRA involved in a prohibited transaction
Effective immediately, this provision confirms that if an individual has multiple IRAs, only the IRA that engages in a prohibited transaction will be disqualified.
Individual 401(k) and Employer-Sponsored Plan Changes
Starter 401(k) plans for employers with no retirement plan
Effective in 2024, an employer that does not sponsor a retirement plan can offer a starter 401(k) plan (or safe harbor 403(b) plan). A starter 401(k) plan (or safe harbor 403(b) plan) would generally require that all employees be enrolled by default in the plan at a 3% to 15% compensation deferral rate.
The limit on annual deferrals would be the same as the IRA contribution limits defined for both Roth and traditional plans: $6,500. This provision will go into effect in 2024.
Employers are allowed to replace SIMPLE retirement accounts with safe harbor 401(k) plans
Employers will be allowed to replace a SIMPLE IRA plan with a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions during a plan year. This provision will go into effect in 2024.
Roth match in a 401(k) plan
Currently, matching contributions in a 401(k) plan are made on a pre-tax basis. This provision will allow employers to make a post-tax Roth matching contribution. This provision is effective immediately.
Roth SEP and SIMPLE contributions
SAR-SEPs and SIMPLE employer contributions are historically made on a pre-tax basis. This provision will allow employers to have the option to make a post-tax Roth SAR-SEP or SIMPLE contribution.
SEP contributions can also be made as a post-tax Roth contribution if elected. Contributions will not reduce the employer’s and employee’s taxable income. This provision is effective immediately.
Employer startup tax credit increase
Employers who have at least one rank-and-file employee can receive a tax credit by setting up an employer plan (i.e., SEP, SIMPLE or 401(k)) if they have not maintained another plan during the prior three years.
The amount of the employer tax credit is currently the greater of 50% of the first $1,000 of expenses ($500.00) or the lesser of $250 per rank-and-file employee capped at $5,000. The credit can be utilized for three years.
Under this new provision, it increases the 50% to 100% for the first year and second year, 75% for the third year, 50% for the fourth year and 25% for the fifth year. This provision is effective immediately.
Eligibility requirements for part-time employees who work 500 hours lowered from three years to two years
Under current rules, employers could generally exclude employees from participating in a 401(k) plan if they have not satisfied the service requirements of the plan. Part-time employees may not have been excluded from participating if they worked for the employer for a period of three years and worked for at least 500 hours during each year.
The new provision lowers the three years to two years, allowing part-time employees to participate in the plan sooner. This could affect employers who maintain Individual 401(k) plans and hire part-time employees. This provision will go into effect in 2025.
Hardship distribution self-certification
Employers may rely on an employee’s self-certification for hardship distributions. The employer may also rely on the employee’s self-certification that the hardship distribution is not more than the actual amount needed for the hardship. This provision is effective immediately.
Reforms family attribution rules (IRC 318) to determine controlled group rules for both separately owned businesses by a married couple and effects on minor children
Community property rules will no longer influence inequities when spouses own two separate businesses in community property states.
Previously, when spouses each had their own businesses, and they resided in a community property state, both organizations would be pulled in for controlled group determination. This meant that in some cases, only one plan had to cover both businesses, even if they were two separate businesses.
Under the new provisions, each spouse’s business would remain separate – even in community property states. This would allow each self-employed or business owner spouse to choose a tax-advantaged plan for themselves, regardless of the business structure or number of employees of their spouse.
The new provision would remain in place even in the case where the couple has a child under the age of 18. It is effective for plan years beginning in 2024.
Retroactive first year elective deferrals for sole proprietors
The SECURE Act allowed employers to establish their 401(k) plan up until their tax return due date, plus extensions. The latest provision affirms that a small business owner who adopts their plan by their tax return due date (plus extensions) will be allowed to defer into the plan, making the deferral effective as of the last day of the plan year. This provision is effective immediately.
Increased threshold for automatic rollovers from $5,000 to $7,000
Non-responsive, terminated participants of a 401(k) plan who had a balance of new contributions with less than $5,000 but greater than $1,000 may have their balances rolled over to an eligible IRA custodian. This threshold has been increased from $5,000 to $7,000. This provision will go into effect in 2024.
Designated Roth accounts no longer part of pre-death RMDs
Effective in 2024, pre-death RMDs in 401(k) plans will no longer be placed in account-designated Roth accounts when calculating RMDs.
The effective dates of these provisions vary. If you have additional questions about what the provisions could mean for your investment strategy, consult your financial, legal, or tax advisor.
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