IN THE WANING DAYS of 2019, Congress passed the SECURE Act, a law that delivered a mixed bag of changes for retirement savers. Well, Congress has been busy again. At the tail end of 2022, a follow-up law—known as SECURE 2.0—was signed into law.
The good news: There’s a whole lot included in this new law. The bad news? There’s a whole lot included in this new law. SECURE 2.0 presents a number of new planning opportunities but, with hundreds of provisions, it’s also a lot to digest. Below are the provisions that, in my view, provide the most meaningful planning opportunities for folks at various ages and stages:
For younger workers. Young people, in many cases, are forced to contend with the twin challenges of relatively low salaries and relatively high student loan burdens. SECURE 2.0 provides some relief.
In the past, when an employer matched an employee’s 401(k) or 403(b) contribution, that match could be made only with pretax dollars. That was the case even when the employee’s own contributions were to the Roth side of the plan. SECURE 2.0 lifts that restriction. Now, an employee can opt to receive his or her employer’s match in Roth form. The match will be reported as income, but that’s okay. Folks earlier in their careers tend to be in lower tax brackets, making it advantageous to opt for Roth contributions.
The second provision for young people recognizes that they often face a tradeoff between saving for retirement and making student loan payments. SECURE 2.0 provides a clever solution. Now, an employer can make a 401(k) matching contribution, but the match will apply to student loan payments made by the employee. Research has shown that the unreasonable price of private college burdens young people in ways that go beyond the financial cost. This provision offers a bit of an offset.
For the self-employed. If you’re self-employed and want to save for retirement, there have typically been three choices, each of which was imperfect:
SECURE 2.0 addresses this by allowing for Roth contributions to SEP IRAs. It won’t be appropriate for all self-employed workers. But for those in particular tax situations, it may be the perfect antidote to an imperfect set of options.
For folks in their early 60s. SECURE 2.0 is unusual in that it contains a variety of provisions targeted at narrow subsegments of the population. Case in point are the new rules on retirement “catch-up” contributions, which are the additional amounts workers age 50 and older can contribute to their company plan each year. This year, the catch-up is $7,500. Starting in 2025, this will be increased to at least $10,000, but only for those ages 60, 61, 62 and 63. This provision won’t help everyone, but it’ll be a useful addition to the playbook for those in their peak earning years.
For those in retirement. The original SECURE Act bumped up the age at which retirees must begin required minimum distributions (RMDs) from tax-deferred retirement accounts—from the endlessly confusing age of 70½ to age 72. Now, Congress has extended that timeline further. Beginning this year, RMDs don’t need to start until age 73. So, if you’re currently younger than 72 or turn 72 this year, you can wait one more year.
The new rule has a twist, though. Beginning in 2033, the starting age will rise again, from 73 to 75. This is a little confusing, so a simple way to think about it is as follows: For those born between 1951 and 1959, the starting age will be 73. For anyone born after 1959, it will be 75.
How can you use these changes to your benefit? For some retirees, RMDs really aren’t a problem, because the initial distribution percentage—about 3.8% of pretax balances as of the prior year-end—isn’t far off the amount they would have withdrawn anyway to meet living expenses.
But if you have other assets or other sources of income, RMDs may result in unneeded income—and an unnecessarily large tax bill. In this situation, the new rules may be very helpful. You’ll have an extended window to distribute dollars out of your tax-deferred accounts at tax rates that likely will be lower than they’ll be after RMDs begin. The most popular way to take these distributions is by moving cash or assets over to a Roth IRA via a Roth conversion.
For those who forget their RMDs. Perhaps the most draconian rule in the past has been the penalty for making a mistake with an RMD. The penalty was equal to 50% of the amount that should have been distributed but wasn’t. That penalty has now been cut in half, to 25%. Moreover, if the issue is corrected within a specified time window, it will be reduced further, to just 10%. Especially with the new age thresholds described above, RMDs can be confusing. This should provide a measure of relief in case of a misstep.
For retirees with charitable goals. A popular strategy for wealthy, charitably minded retirees is to make donations directly from a tax-deferred account. These are called qualified charitable distributions (QCDs), and they’re one of the only ways to take money out of a tax-deferred account without incurring any tax. QCDs can start as early as age 70½. This provides a helpful head start if your objective is to trim the size of your IRA before RMDs begin at 73 or 75.
In the past, QCDs were limited to $100,000 per year. Under SECURE 2.0, that figure will increase with inflation going forward. To be sure, this benefits only a small number of retirees, but if you’re in that category, it’s a benefit to keep in mind.
For empty-nest parents. Have your children graduated from school, leaving excess funds in a 529 college savings account? It’s a good problem to have, but in the past, the options were limited. You could leave the surplus for another relative—perhaps future grandchildren—or you could withdraw it. But withdrawals for non-educational uses entailed taxes and penalties. SECURE 2.0 provides another option, though it won’t take effect until next year.
Under the new rule, you can distribute funds out of a 529 and into a Roth for the beneficiary. That sounds great, though there are a number of restrictions. First, the total amount that can be moved is $35,000 per beneficiary, and that’s a lifetime limit. There’s also an annual limit which dovetails with the annual IRA contribution limit, so you couldn’t move the entire $35,000 all at once. Finally, the 529 needs to have been open for at least 15 years, and the funds to be moved need to have been in the 529 for at least five years. The goal, of course, is to prevent clever parents from using the new rule simply as a means to funnel $35,000 into a child’s Roth IRA. But if you meet the criteria, it’s a nice new option.
For employers to consider. If you own a business, many of the provisions in SECURE 2.0 are employer-specific and worth considering. Of particular interest is a new vehicle for employers to help their lower-paid employees build emergency funds.