On December 30, 2022 the President, as part of an omnibus spending bill, ‘SECURE 2.0’—the latest update to 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act—could have the greatest impact for workers enrolled in qualified employer retirement plans.
Here are some of the major provisions of SECURE 2.0 effective in 2023
- RMD Age Goes Up to 73: For many, SECURE 2.0 will have the greatest impact for providing more time for workers to accumulate retirement assets before they have to start mandatory withdrawals, known as required minimum distributions (RMDs). RMDs are required in traditional, SEP-IRA, or SIMPLE IRAs, and qualified retirement plans. Formerly set at age 72, RMDs must start at age 73 in 2023, rising to age 75 in 2033.
- RMD Penalties Go Down: If you fail to take your RMDs on time in 2023, it will still sting—but not as much. That penalty now drops from 50% of the RMD amount not withdrawn on schedule to 25%. That penalty will shrink to 10% for IRA holders if they withdraw the RMD amount that hadn’t been taken and submit a corrected tax return in a timely manner.
- Big Changes in Roth Investing, Part 1: If you either have or plan to invest in an employer-sponsored Roth 401(k), now might be a good time to refresh your knowledge. Employers already can elect to match Roth 401(k) contributions just as they would with ordinary 401(k)s. However, before this new law, those matching Roth funds would have to be placed in an ordinary 401(k) on a pre-tax basis. In 2023, employers can let workers choose whether their matching amount will go directly into an ordinary 401(k) or a Roth. Also, the new law adds SEP-IRAs and SIMPLE IRAs to the list of employee plans that are allowed to accept Roth contributions.
- Emergency Withdrawals Get a Boost: Employees will be able to withdraw up to $1,000 per year from their qualified employer 401(k) plan penalty-free for emergencies—as long as they repay those funds within three years. Income tax is still due on the withdrawal but without the typical 10% penalty employees under age 59 1/2 would have to pay. There is one hitch, though. If the withdrawal is not repaid within three years, employees will be required to wait until the three-year period ends before being allowed to make another emergency withdrawal.
- New 3-Year Repayment Rule for Adoption, Birth Expense Plan Withdrawals: The previous SECURE Act allowed employees to withdraw retirement funds for qualified birth or adoption expenses without the typical 10% penalty and no repayment deadline. Now, there’s a three-year deadline for full repayment to avoid the penalty.
- Early Withdrawal Penalties Waived for Terminal Illness in ’23, Other New Events in ’24: SECURE 2.0 adds four new exceptions to the 10% early withdrawal penalties starting with terminal illness in 2023, and cases of domestic abuse, financial emergency, and natural disaster in 2024. Consider reviewing the rules for each of these situations to see if you qualify and note that some have specific penalty-free withdrawal limits.
- New Rules for Using IRA Distributions for Charitable Giving: For individuals who use charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts to make charitable contributions, SECURE Act 2.0 allows a one-time gift of up to $50,000 through those vehicles. Also, the current $100,000 limit for qualified charitable distributions (QCDs) will now be indexed for inflation.