Brian T. Jones, CFP®
Brian T. Jones, CFP®Chairman, Financial Adviser, Principal
Parker G. Trasborg, CFP®
Parker G. Trasborg, CFP®Senior Financial Adviser

On December 29, 2022 Congress passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 as part of a larger spending package. The original SECURE Act was signed in December 2019. The updates in SECURE Act 2.0 cover a wide array of pre and post-retirement planning issues. Below is a summary of several of the provisions we find most applicable to our clients:

Required Minimum Distributions (RMDs)

Beginning in 2023, SECURE Act 2.0 raises the beginning age for RMDs from age 72 to age 73.  It pushes the age back further from age 73 to age 75 beginning in 2033. Prior to the passing of the original SECURE Act at the end of 2019, the age to start taking RMDs was 70 ½ years old.

Additionally, SECURE Act 2.0 reduces the penalty for a missed RMD from 50% to 25% of the shortfall, and if the mistake is corrected in a “timely” manner, the penalty is reduced even further to 10%.

Qualified Charitable Distributions (QCDs)

Interestingly, SECURE Act 2.0 keeps the age that QCDs can begin at age 70 1/2.  Thus, you can start making distributions from your IRA directly to charities before RMDs must begin, which will reduce the amount of future RMDs (as the account value will be smaller).  SECURE Act 2.0 indexes the maximum annual QCD amount for inflation beginning in 2024, increasing the amount from the current $100,000 limit per year.

As a reminder, our custodian, Pershing, can make QCDs easier by allowing an IRA account to have a checkbook attached to it for making such distributions.  Please note that Pershing is not able to track the amount given directly to charity on the annual 1099, meaning you should keep copies of QCD checks to share with your tax preparer to ensure you receive the benefit of making the distribution and avoid being taxed on the distribution.

Catch-up Contributions

For those age 50 and over, employer retirement plan catch-up contributions have increased from $6,500 in 2022 to $7,500 in 2023. Starting 2025, those age 60 to 63 may make catch-up contributions to employer retirement plans (401(k)s, 403(b)s, TSPs, etc.) up to the greater of $10,000 or 150% of the regular catch-up contribution amount.

Automatic Enrollment in 401(k)s beginning in 2025

To encourage retirement savings, new employer-sponsored retirement plans beginning in 2025 must now include automatic enrollment of employees at a minimum contribution rate of 3%. The rate will increase 1% each year up to at least 10%, but no more than 15%. There are several exemptions to the rule including new businesses, businesses with fewer than 10 employees, church plans and governmental plans.

Student Loan payments

Beginning in 2024, employers will be able to amend their work retirement plans to make matching contributions to an employee’s 401(k) when the employee makes a student loan repayment. As the cost of education rises, many are unable to afford to pay down their student loans and contribute into their work retirement plan. Traditionally, saving into a work retirement plan often includes the perk of having your employer match a percentage of what you contribute, boosting your retirement savings over time.  This new rule will enable many people the opportunity of paying off their student loan and saving for retirement at the same time, rather than having to choose.

Tax free rollovers from 529 plans to Roth IRAs

An issue we have seen with clients for some time has been what to do with excess remaining proceeds in 529 plans after the child or grandchild has graduated from college. Beginning in 2024, the beneficiary of a 529 savings plan can make a direct rollover from a 529 plan in his or her name into a Roth IRA without tax or penalty. The 529 plan must have been open for more than 15 years. The bill limits the amount that can be rolled to a Roth IRA to the annual Roth IRA contribution limit (the greater of 100% of income or $6,500 in 2023) and also limits the lifetime rollover amount to $35,000.

Please note that the highlights above do not constitute all of the changes made in the SECURE Act 2.0. This is a short list highlighting the changes we thought were most relevant to our clients. As the IRS works to clarify these new changes in the tax code, we will work to keep you up-to-date on any financial planning changes that may prove relevant. While we recognize that sometimes politics intersects with all things financial, our intent with this article is simply to inform you of recent changes to the tax code (and some upcoming changes that happen many years in the future, assuming no changes between now and then) and keep the politics out of the conversation. If you have specific questions about any of the new provisions contained in SECURE Act 2.0, please do not hesitate to reach out directly to your planner.