Highlights of the Secure 2.0 Act on Retirement Savings

The SECURE 2.0 Act is now law. The legislation provides a slate of changes that could help strengthen the retirement system—and Americans’ financial readiness for retirement. There is quite a bit to unpack in the legislation, but here are some key takeaways and what they mean for retirement savers in 2023:

  1. RMD overhauls:
    1. The RMD age has increased from 72 to 73 starting Jan 1, 2023. If you turn 73 in 2023 or later, that will be your RMD age.  For those who turned 72 in 2022 or earlier, the RMD schedule will remain as is.  Last, in 2033, the RMD age will be pushed back to age 75 (even though other legislation could come into play over the next decade).
    1. The 50% penalty for not taking an RMD is being reduced to 25%.  It is further reduced to 10% in IRA accounts if the missed RMD is corrected.
    1. Roth employer retirement accounts will be exempt from RMDs.
  2. Roth Employer Match: Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts (although it may take time for plan providers to offer this and for payroll systems to be updated). Previously, matching in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, after which earnings can grow tax-free. This is a huge win for savers, especially those who are younger or who have a lower than normal annual income.
  3. QLACs:   Qualified longevity annuity contracts (QLACs) are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that begin payments on or before age 85. The premium limits increased from $145,000 to $200,000 starting Jan 1, 2023.  The limitation that the QLAC only account for up to 25% of an individual’s retirement account balance has been eliminated.
  4. Roth SIMPLE and SEP IRAs: Starting in 2023, employers will be allowed to create Roth accounts for SIMPLE and SEP IRAs.  These accounts have historically only been available for pre-tax contributions.
  5. Rollovers of 529 Plan balances to Roth IRAs: Beginning in 2024, based on provisions in the new law, you’re allowed to roll up to $35,000 of leftover funds in a 529 into a Roth IRA. Prior to 2024, 529 dollars were subject to a 10% penalty on any non-qualified withdraw.  That is still the case, but the rollover to a Roth IRA will be an exception. The 529 must have been in effect for at least 15 years and the funds must go into an account owned by the same beneficiary.

There are more provisions included in the Secure 2.0 Act and many different timelines in which the changes will be implemented. A lot of these changes hinge on the ability for employers and 401k sponsors to update their systems to reflect these changes.  It will be important for individuals to continuously monitor their financial plan over the next few years to consider what opportunities will be best to take advantage of.

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