The Secure Act 2.0 was finally passed as just one part of a massive funding package by the outgoing congress just before Christmas on December 23, 2022, and signed into law by the president as the Consolidated Appropriations Act of 2023, an omnibus spending bill authorizing roughly $1.7 trillion in new Federal spending (yikes!).
You’re probably already familiar with Secure Act 1.0, which passed at the end of 2019. Most notably, it raised the Required Minimum Distribution (RMD) to age 72. It also allowed those with unused 529 (college savings account) money to pay off student loans and gave employers incentives to offer improved 401(k) plans.
Secure Act 2.0 (which contains many more provisions than I would have thought—almost 100!) makes a lot of additional changes, and most are good for savers, investors, employers, and employees.
The act itself is massive. If you want to read more about the new law, use this link to a page with many good resources. In this article, I’m going to touch on those that seem most relevant to the readers of this blog—those who are 10 to 20 years from retirement or already retired. I also offer a brief take on them.
Expanding Coverage and Increasing Retirement Saving
The RMD age goes up (again).
Secure Act 1.0 increased the RMD age from 70.5 to 72. Starting in 2023, you won’t have to start taking RMDs from your traditional IRAs, traditional 401(k)/403(b)s, and Roth 401(k)/403(b)s until age 73. The age goes up again to 75 starting in 2033.
If you’re already taking RMDs, or withdrawing from a taxable requirement account in an amount roughly equivalent to it (I am), then this change won’t impact you much. However, this is some welcome news if you want to postpone RMDs (and the tax on them) for as long as possible.
This change increases the window for doing Roth conversions for those who will benefit from them. Reducing Traditional IRA balances and adding to a Roth IRA effectively reduces RMDs since they are not required for Roth accounts.
For further reading: Thinking (But Not Too Concerned) About RMDs
IRA Catch-Up Contributions will be indexed to inflation.
Catch-up contributions have been a flat $1,000 extra. But starting in 2024, the additional amount those aged 50 and over can contribute to an IRA each year will be indexed to inflation. The increases will be made in increments of $100.
The ability to make catch-up contributions can be a blessing for those trying to make up for the lost time saving for retirement. The increases for inflation won’t be substantial, however, unless inflation is extremely high (it’s historically averaged 2 to 3 percent). Still, compounding can make them more significant.
For further reading: Redeeming Retirement
You can make even higher catch-up contributions if you’re in your early 60s.
Those who are 60–63 years old can increase their 401(k) catch-up contributions by an amount equal to the greater of $10,000 or 50% of the current catch-up contribution (which is now indexed to inflation). For 2023, that’s $10,000 ($6,500 x 150% = $9,760), but it could be more in the future, depending on inflation. (This also applies to SIMPLE IRAs.)
When you’re playing catch-up, every little bit helps, especially as you get closer and closer to retirement.
You can now make emergency 401(k) and IRA withdrawals without penalty.
Emergency funds up to $1,000 may now be withdrawn from a retirement account without paying the 10% early-withdrawal penalty (if withdrawn before age 59 1/2). However, you still have to pay tax on tax-deferred savings. You may also pay it back (and presumably get a tax deduction for it) for three years—this starts in 2024.
I’m not a big fan of withdrawing from retirement savings accounts due to emergencies—that’s what your emergency fund is for. However, life happens, so I generally view this as a favorable change, especially for low-earners. If you must borrow from your savings, try to pay yourself back as soon as possible.
You can roll over unused 529 college plan savings to a Roth IRA.
529s are tax-advantaged savings plans designed to pay education expenses (K-12 and post-secondary). They include savings plans and state-prepaid tuition plans. Under the new law, up to $35,000 of unused savings can be rolled into a Roth IRA if the 529 has been established for at least 15 years. This replaces the annual Roth IRA contribution for the year you roll the money over; it’s not in addition to it.
This will surely benefit some people, especially those who over-save for college (though I suspect they are few and far between). If you’re playing catch-up and have surplus money tucked away in a 529 plan, you may want to take advantage of this. But read the fine print—there are many conditions.
For further reading: Retirement Account Rollovers and Transfers—You’ve Got to Get it Right
Preservation of Income (Annuities and Retirement Income)
It will be easier for employers to put annuities into their retirement plans.
An actuarial test kept certain more complex annuities out of employer retirement plans. The new law eliminated the test in 2022.
I’m not sure whether this will be a good thing for retirement savers or not. As you know, I’m not anti-annuities; there are good and bad products out there. I am most concerned about the more complex and costly ones, which employers can now include more frequently in retirement plans.
That will be a boon to annuity sales (read: big commissions to annuity salespeople). It may also enable some bad annuities to find their way into retirement plans, which could be bad for employees and also employers if it goes against their responsibility to act as fiduciaries on behalf of their employees.
For further reading: Should I Include Annuities in my Retirement Plan?
It will be easier to put QLACs into retirement plans.
Qualified Longevity Annuity Contracts (QLACs) are a relatively new type of deferred income annuity that you can fund with a qualified retirement plan or IRA. In addition to providing a sort of ‘longevity insurance,’ another significant benefit is that the money used to purchase a QLAC is exempt from RMDs until age 85.
Under the old rules, someone could spend 25% or $135,000 (whichever is less) from their retirement savings account or IRA to purchase a QLAC. The new law has relaxed the rule, and now up to $200,000 can go into a QLAC. It went into effect in 2022.
Those concerned about RMDs may see some benefit from this, as will those considering a longevity annuity to try to ensure they don’t run out of money in retirement or use them as a type of long-term care insurance.
As with other types of annuities, there are good QLACs and bad ones. So, I have the same concerns about this provision as the one above—choose wisely.
For further reading: The Stewardship of Life: Hybrid Long Term Care Annuities
Simplification and Clarification of Retirement Plan Rules
The RMD penalty has been cut in half.
One of the most impactful penalties in the tax code has been the ‘failure to make RMD penalty,’ which was 50% of what should have been withdrawn based on the IRS rules. The new law reduced it to 25% starting in 2023.
The failure to take the RMD usually occurs due to 1) a lack of understanding of what the IRS requires and when or 2) a failure to put the necessary withdrawal and accounting mechanisms in place to meet the requirement. That’s why it’s essential to read up on this as you approach RMD age (now 72). Working with an advisor or your retirement account custodian is also important to ensure you meet the requirement.
QCD annual limits are now indexed to inflation.
The annual limit on a Qualified Charitable Distribution (QCD) used to be $100,000 (a pretty large amount for most people). The new law has indexed it to inflation starting in 2023. You can also make a one-time $50,000 charitable distribution via a charitable trust or annuity.
I just wrote an article about QCDs and how I plan to start making them this year. They offer an excellent opportunity to further your generosity in retirement while getting a tax advantage even if you don’t itemize. Whether an inflation adjustment to the annual limits will benefit you depends on how much you are giving.
For further reading: Looking Forward to Making Qualified Charitable Distributions (QCDs)
Roth 401(k) RMDs have been eliminated.
Retirees have never been required to make RMDs from a Roth IRA during their lifetime. Although employer plan Roth accounts (401(k), 403(b), 457(b), etc.) have been subject to the RMD rules (though, unlike RMDs from traditional accounts, the distributions could be made tax-free) starting in 2024, they won’t.
Because of the historical disparity, most people transfer their Roth employer plan assets to a Roth IRA when they retire. Now the decision to roll over assets will be similar to the factors to consider when rolling over assets from a traditional plan.
Like many people, most of my employer plan savings were in traditional (taxable upon distribution) 401(k) accounts. I rolled them over when I retired to a Traditional IRA that I self-manged.
I also had a very small Roth 401(k) account that I rolled into a Roth IRA. (I could only roll over my contributions and earnings, not my employer-matching contributions and earnings. Per IRS rules, they had to go into my Traditional IRA.)
For further reading: Retirement Account Rollovers and Transfers—You’ve Got to Get it Right
A surviving spouse can elect to be treated the same as the deceased spouse for RMDs.
Starting in 2024, a surviving spouse can now elect to be treated as their deceased spouse for RMD rules. That’s in addition to the other options that deceased spouses have (roll the deceased’s IRA into their own, treat the IRA as their own, or receive special treatment as a beneficiary).
This change seems most beneficial to a survivor who inherits an IRA from a younger spouse. They can delay RMDs until the deceased spouse has reached RMD age. Furthermore, once RMDs are started, the surviving spouse can use the IRS Uniform Lifetime Table for account owners rather than beneficiaries.
RMDs are a reality for account owners and those who inherit their assets. My wife and I are only about eight months apart in age, so I don’t think this would be of much consequence to her should I predecease her. Still, I think these kinds of things are good to know (and to help your spouse to understand) as a way of “loving your widow (or widower).”
For further reading: Loving Your Widow with Wise Stewardship
You can take a long-term care insurance premium exception applied to the 10% early withdrawal penalty.
Under most circumstances, there’s a 10% early withdrawal penalty (plus any taxes due) for withdrawals from retirement plans before age 59 1/2. But under the new law, you can withdraw up to $2,500 per year from your retirement savings to pay long-term care insurance premiums without paying the 10% early withdrawal penalty. That takes effect in 2026.
Early withdrawals from your retirement savings are generally a bad idea, no matter the reason. Taxes and penalties not withstanding, there is also the lost earning from future growth—$2,500 withdrawn at age 55 could be a lot more by age 75.
That said, some people what to buy long-term care insurance when they are younger, and premiums are less expensive. If they can’t afford it, the government wants to help by letting us use some of the savings for that purpose without incurring the 10% penalty. Do this if you must, but finding the money somewhere else in your budget might be a better way to go.
For further reading: The Stewardship of Life—Long Term Care
Miscellaneous Changes (Administrative, Clerical, Technical)
I’m not sure why some of these were in a separate section, as several are directly related to the other sections of the bill.
You can now make Roth contributions to SIMPLE and SEP IRAs.
SIMPLE and SEP IRAs are types of IRAs reserved for employers and sometimes self-employed individuals as sole proprietors. SIMPLE stands for Savings Incentive Match Plan for Employees, and SEP stands for Simple Employee Pension.
A SIMPLE IRA is much like a traditional IRA but with a higher contribution limit. A SEP IRA is more like an employer-defined benefit plan (pension) in that the employer makes contributions to the plan for the employee.
Both types of IRA have been limited to traditional (tax-deferred until withdrawal) contributions. Still, under the new law, you (or your employer) can make Roth contributions to SIMPLE and SEP IRAs starting in 2023.
The majority of IRA owners do not have SIMPLE or SEP IRAs. However, those who do can now have the tax benefits of a Roth account (not taxable upon withdrawal).
Employer matching contributions can be Roth too.
I mentioned earlier that employer contributions to Roth 401(k) or 403(b) type accounts must be treated as traditional contributions. Under Secure Act 2.0, employers can now allow their matching dollars to go into the Roth sub-account instead. Like employee Roth contributions, they will be taxable to the employee and immediately vested. It started in 2022.
If you favor Roth accounts, this will be good news. However, there are tax implications in the year the employer contribution is made, so be sure to consider that if your employer offers this and it is appealing to you.
I think a Roth 401(k) is generally good for those with low-paying jobs who expect to make more in the future. Prepaying tax now makes sense because they are doing so at a lower rate than they are likely to be subject to in retirement. (College students and those working in entry-level jobs are good examples.)
I didn’t contribute to a Roth 401(k) until late in my career. I did so without much thought—it seemed a good idea to get some “taxation diversification.” I rolled that 401(k) over into a Roth IRA, and I plan to let that account grow tax-free for as long as possible and then take tax-free withdrawals later in retirement (when tax brackets may be higher).
For further reading: Investing for Retirement
Common Grace
There is a lot to digest in this new law. Most of the changes are positive, some, such as auto-enrollment in employer plans, have a little of a “nanny state” feel, and others are intended to correct disparities or inconsistencies of past legislation.
Some would say that this new law points to the over-complexity of both our tax and retirement systems. That may be true, but for now, it’s all we have to work with, so I’m grateful for the good of the common grace God has provided to all of us who live, work, save, invest, and retire in this country.
