Just before Christmas, Congress decided to fund the government. As part of the $1.7 trillion omnibus spending package that was passed, the Secure Act 2.0 was tacked on. This is an update on the 2019 bill, Setting Every Community up for Retirement Enhancement Act. 1
There is a lot tucked away in the bill… and I mean a lot. The full text is over 4,000 pages long. 2
To help distill a lot of the noise, which won't affect most people, I'm going to break some of the main topics up into two sections:
items that affect those saving for retirement, and
items that affect those near or in retirement.
Key changes for those in or near retirement
- Changes in the RMDs (Required Minimum Distributions) 3
- If 72+, born 1950 or earlier, no change in RMD age
- If 64-71, born 1951-1958, RMD starts at age 73
- If 63, born 1959 or later, RMD starts at age 75
- The penalty for missing an RMD (or not taking enough of an RMD) is being reduced from a whopping 50% to 25%. That’s still a painful penalty, so I still suggest working with a planner that helps verify your RMDs every year.
- Widowed spouses will be able to take RMDs based on their deceased spouse’s age which could help those in financially difficult positions.
- Removal of the Roth 401(k) RMD to now match the Roth IRA rules. Roth IRAs do not have an RMD, now Roth IRA & Roth 401(k) are aligned.
- And finally, the highly anticipated change, the new Required Minimum Distribution start ages:
Note – if you turn 72 next year, your first RMD does not need to be taken until 2024!
- Increase in the catch-up contribution amounts.
- Next year, IRA contributions for those age 50 and over are $6,500 + an extra $1,000 for their catch-up provision. Starting January 2024, that $1,000 will be indexed to inflation, increasing every year based on federal COLA changes.
- Starting in 2025, in qualified retirement plans like 401(k)’s and 403(b)’s, workers ages 60-63 increase their contribution catch-ups from $7,500 to $10,000 or 150% of pay.
- Confusing? That’s not even the worst of it. This bill gets a little hairy at times.
- For those who have an account with a 72(t) or 72(q) distribution, you’re used to stringent, non-flexible rules. Generally, once you start a 72(t) distribution you must keep that account for 5 years or 59 ½, whichever is longer.
- Going forward, the IRS is now allowing a 72(t) account to be split up, for example transferring one account into two different IRAs. As long as those two IRAs satisfy the 72(t) distribution, the account stays in compliance.
- This is a welcome change for quite a few people with a 72(t) account.
Key changes for those saving for retirement.
- 401(k) - Student Loan payments
- In a much-requested amendment, congress is now allowing savers to make direct 401(k) contributions towards their student loan payments.
- If the 401(k) plan has a match, the employer match goes directly into the 401(k).
- There’s a slight issue in the bill as it stands right now, where the employee is responsible for making sure the student loan payment was actually made. It seems that the employee simply has to attest that the loan payment happened and that the employee didn’t just pocket the funds. I’m not sure how this will be corrected yet, but at least the private letter ruling can finally be adopted wide-spread.
- Right now, all 401(k) employer matches are pre-taxed in nature and are taxable when the funds are drawn. Once the IRS clarified the payroll rules, employees will be able to elect for employer match to be Roth 401k funds.
- Employees will have to pay taxes on those contributions, effectively creating phantom income, but for those who want all money to “rothify”, this provision is a welcomed addition.
- The bill includes a pathway to create a national database for old, forgotten 401(k) plan balances.
- There’s not a lot of solid information on this “401k lost and found” but hopefully it will be better than old balances escheating and going to the state, which has created taxable events in the past.
There are a lot more provisions in the bill that might peak the interests of some, such as:
- Creation of a 401k savers account
- Ability for, in some circumstances, 529 Plan rollovers to a Roth IRA. This could potentially be a great way for high-income folks to fund a Roth.
- QCDs to be indexed with a COLA, and updates to allow CRUT & CRAT contributions.
- ABLE accounts for disabled persons expanded to age 46 from 26.
- 401k Emergency Withdrawal provisions of $1,000 penalty-free once every 3 years or sooner.
- 401k withdrawals for domestic abuse victims of 50% or $10,000 from a 401k, whichever is less.
- Creation of the SEP Roth IRA and SEP Simple IRA.
- Complicated Simple IRA additional rules.
There’s more, but this is a great starting place.
Here's another article for your viewing pleasure posted by Barron's: