Jan 25, 2023 Secure Act 2.0- Summary of Key Changes to Retirement Plans
The SECURE Act 2.0 was signed into law on December 29, 2022, expanding on the original SECURE Act signed at the end of 2019. The law addresses various components of retirement savings plans to encourage retirement savings. Here’s a summary of some of the key components that may be relevant:
- The age for RMDs increased. The original SECURE Act increased the age to start taking RMDs (requirement minimum distributions from IRAs & employer retirement plans) from 70.5 to 72. The age now increased to 73. In 2033 the age is set to increase to 75.
- The penalty for missed RMDs decreased. There was a 50% penalty for missed RMDs. Starting in 2023, the penalty is decreased to 25% or 10% if corrected within two tax years.
- Excess 529 funds can be rolled into Roth IRAs. A maximum of $35,000 from 529 education savings plans can be rolled into Roth IRAs. The account needs to be opened for at least 15 years & the amounts rolled over annually cannot exceed the annual IRA contribution limit ($6,500 for 2023).
- The Saver’s Credit will be deposited into an IRA. Certain taxpayers are eligible for a nonrefundable credit (a credit that reduces tax owed but doesn’t get refunded) based on amounts contributed to retirement accounts. Starting with 2027, the credit will become a matching credit, where the IRS will match 50% of the retirement contribution and will deposit the refund straight into the taxpayer’s IRA. The maximum match will be $1,000 or $2,000 for married filing joint (to match the taxpayer’s $2,000/$4,000 contribution). This credit only applies to taxpayers will lower levels of income.
- More options to access retirement funds for emergencies. Effective in 2024, one can withdraw $1,000 from an IRA/401k for emergency use. The withdrawal will be taxable but not subject to the 10% penalty on an early withdrawal. The withdrawal can be returned within three years for a tax refund. An additional withdrawal of $1,000 can be made once the original withdrawal is repaid or three years elapsed. Another option is that employers can add an account to their employees’ retirement accounts to be used for emergencies. The maximum that can be held in that fund is $2500. This account is treated like a Roth IRA (contributions aren’t deductible, and withdrawals aren’t taxable).
- Penalty-free early withdrawals for terminal illness. Effective immediately, individuals who are terminally ill may withdraw from their retirement accounts before age 59.5 without incurring a 10% penalty.
- More Roth options. A Roth IRA is a retirement account that accumulates tax-free and distributes tax-free. One of the limitations of Roth IRAs is that high earners cannot directly contribute. There is a new option to fund a Roth through a SEP or SIMPLE retirement plan, available to some small business owners & self-employed. These plans allow high earners to contribute to Roth accounts. Additionally, there already exists the option to fund a Roth through 401(k) plans. However, these plans were treated differently than Roth IRAs in that owners of Roth IRAs aren’t required to take RMDs, but owners of Roth 401(k)s were required to take RMDs. That has changed, and now Roth 401(k)s are treated the same as Roth IRAs in that aspect.
For more information on the original SECURE Act, read our previous blog here.