SECURE Act 2.0What You Need to Know

2/13/2023 - By Chris Stennett, CFP

As the final days of 2022 drew to a close, US lawmakers passed an omnibus spending bill authorizing $1.7 trillion in government spending. Included within the bill was a retirement-focused bill dubbed SECURE Act 2.0. The name references the original SECURE Act, which was passed almost three years ago to the day. In the first SECURE Act, investors saw monumental changes to retirement accounts, as the “stretch” IRA was eliminated, and the Required Minimum Distribution age was pushed back. SECURE 2.0 contains many more provisions than its predecessor, and as such, will take a longer time to understand the total impact it will make on American retirement.

Before getting into some of the key provisions, it’s helpful to understand why the SECURE Act 2.0 is being signed into law. The average retirement savings for individuals at or near retirement is approximately $200,000. If we assume a 4% withdrawal rate for the first year of retirement, we see that $8,000 ($200,000 x 4%) is not enough to live on. That means that more than half of Americans are significantly underfunded for retirement. 

How did we get here?

The burden of funding retirement savings has shifted dramatically over our clients’ lives. Social Security was established in 1935 when the average life expectancy was 58 years old. Today, it’s almost 80. During this time, we’ve seen employers shift the responsibility from employer-funded Defined Benefit Plans (also known as pensions) to the employees via Defined Contribution plans. This is problematic for two reasons: First, with no mechanism to encourage Americans to save, many have chosen to postpone or completely forego savings. From a humanitarian standpoint, many Americans can expect to live a life worse than they experienced while working. Second, there’s an underlying economic crisis brewing as these underfunded individuals will look to various social programs such as Medicaid for help, causing further strain on already stressed programs. When you hear about a Retirement Crisis – this is what they’re talking about.

To try and tackle this problem, lawmakers passed the SECURE Act in 2019. Building off that success, SECURE 2.0 was passed in 2022. Below are some of the key provisions contained within the Act:

Change RMD age from 72 to 73 (or 75 depending on birthdate)

Required Minimum Distributions (RMDs) are mandated distributions that account holders must take from their retirement accounts. SECURE 1.0 changed the RMD age from 70.5 years old to 72. With SECURE 2.0 we see another change, taking the initial age from 72 to 73 years old, for individuals born before 1960. For those born in or after 1960, the RMD age has been changed to 75 years old.

Roth Focused Provisions (2024)

SECURE 2.0 has several provisions related to Roth contributions. The first is particularly important to business owners as both Simple IRAs and Simplified Employee Pension (SEP) IRAs will be allowed to accept Roth contributions beginning in 2024. Previously, these plan types could only be funded with pre-tax dollars. The second provision applies to RMDs for Roth accumulations in employer-sponsored retirement plans such as 401(k)s, 403(b)s, and 457(b)s. Prior to the law change, account holders who were required to take an RMD were required to distribute an amount based on the total account value, including any Roth contributions. While Roth contributions are not subject to tax, removing them from a tax-advantaged retirement account eliminates the ability for tax-free growth within the account. With the passage of SECURE 2.0, only pre-tax contribution sources will be eligible for RMDs so the Roth funds can continue to accumulate within the plan. 

The third Roth focus provision relates to 529s and the potential to convert the account to a Roth IRA. At first glance, this provision looks attractive, but it comes with some important conditions. The annual amount that can be moved to a Roth IRA is based on the IRA contribution limit of that year ($6,500 for 2023) and the maximum that can be converted via this method is $35,000 during their lifetime.

Catch-Up Contributions

Catch-up contributions allow investors above the age of 50 to save more money in their retirement account. Currently, the amount that can be contributed to an IRA via catch-up is $1,000 ($7,500 for employer-sponsored plans). Historically this amount has only increased incrementally every few years. Starting in 2024, the annual catch-up amount will be indexed for inflation and will increase more in line with CPI. SECURE 2.0 also requires that any catch-up contribution made by an individual earning $145,000 in wages will be designated as Roth. Finally, starting in 2025, employees who are 60 to 63 years old can take advantage of a higher catch-up amount of $10,000.

Qualified Charitable Distributions (QCDs)

Qualified Charitable Distributions allow investors 70.5 years or older to make tax-free contributions to charity, up to $100,000. Starting in 2024, this amount will be annually indexed for inflation. Another QCD-related provision found in the SECURE 2.0 is the ability to fund a split-interest entity. This is a one-time opportunity to use a QCD to fund a Charitable Remainder UniTrust (CRUT), Charitable Remainder Annuity Trust (CRAT) or Charitable Gift Annuity (CGA) and is limited to $50,000. Because of the complexity involved with this new provision, we recommend consulting a tax professional before implementing it.

Annuity-Focused Provisions

Beginning in 2023, income annuities held within qualified plans and IRAs are able to offer additional benefits without violating Required Minimum Distribution rules. These benefits include guaranteed increases of income payments of a flat percentage annually, not to exceed 5%; lump sum payments that result in the shortening of the payment period; accelerations of payments that would otherwise be payable within the next 12 months; dividend-like payments to annuity owners; and offering Return-Of-Premium (ROP) death benefits. The act also instructs the IRS to amend its regulations to allow insurance dedicated Exchange Traded Funds (ETFs) as an investment. 

Others, but certainly not all

Qualified Long-Term Care Distributions: Starting in 2026, up to $2,500 per year can be withdrawn penalty-free from retirement accounts to pay for long-term care insurance.

Excise tax reduced for RMD shortfalls: Effective now, the penalty (excise tax) for failing to take some or all of an RMD in a required year, is reduced from 50% to 25%. The penalty can be further reduced to 10% if the shortfall is corrected in a timely manner. 

Student Loan Payments for Retirement Savings: Beginning in 2024, employers can amend their plans and allow matching contributions for employees making student loan payments. The employer can treat the loan repayments as retirement plan contributions for the purpose of making a matching contribution on the employee's behalf. 

401(k) Auto-enrollment: Starting in 2025, most new employer-sponsored retirement plans will require automatic enrollment for their employees. This will require employees to opt out of saving rather than opting in, which has proven to be an effective way to increase retirement savings. 

The SECURE Act 2.0 was introduced with bi-partisan support to help Americans save more for retirement. With a bill as big as this, there are still a lot of unknowns left to contend with. While there are still many details that need to be sorted out, the Act appears to be another step in the right direction for improving the American retirement landscape. 


If you have any questions about the SECURE Act 2.0 and how it affects retirement, contact your Saltmarsh Financial Advisors

About the Author | Chris Stennett, CFP®

Chris is a senior financial advisor and Certified Financial Planner® practitioner for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. He serves individuals and organizations as a comprehensive financial planner and coordinator of investment activities. His areas of expertise include investment management, income planning, tax and estate planning and risk management. Chris has over a decade of experience as a wealth manager working with teachers, federal and state employees, retired Armed Forces and private-sector employees. 

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