SECURE Act 2.0
The SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 was enacted on December 29th, 2022, as part of the Consolidated Appropriations Act of 2023. The SECURE ACT 2.0 is built upon the SECURE Act of 2019 with the aim of improving retirement savings opportunities. The Act introduces 92 new provisions to promote retirement savings, including measures to lower the cost of establishing retirement plans for employers, increase retirement savings for individuals, and enhance current retirement rules. Notable provisions include raising the age for taking required minimum distributions (RMDs), automatic enrollment for 401(k) participants, and tax benefits for employers. The legislation garnered broad bipartisan support.
Under the new RMD rules, the SECURE Act 2.0 raises the RMD age from 72 to 73 beginning January 1, 2023, and again to 75 in 2033. In addition, the Act reduces the penalty and excise tax for failure to take an RMD from 50% to 25%, with a further reduction to 10% if the failure is corrected promptly. This provision applies to tax years commencing after December 31, 2022.
Automatic retirement plan enrollment requires new retirement plans to automatically enroll participants in a 401(k) with a default contribution of 3% of an employee’s salary, increasing by 1% annually until contributions reach at least 10%, but not exceeding 15%. Participants must actively opt out of this feature if they choose to do so. Small businesses with ten or fewer employees, new businesses less than three years old, church plans, and government plans are exempted from this provision, which takes effect in 2025.
Changes to catch-up contribution limits assist participants who are 50 or older in making larger contributions to individual retirement accounts and employer-sponsored plans such as 401(k)s. In 2023, this allows for an additional $7,500 in contributions on top of the $22,500 limit for qualified workplace retirement plans (401(k)s & 403(b)s). The SECURE Act 2.0 also introduces a new category of catch-up provisions for retirees that increases the limits for 401(k), 403(b), and 457 plan participants from ages 60-63 to the greater of $10,000 or 150% of the standard catch-up amount for that year, starting December 31, 2024. For SIMPLE plans, the catch up contribution limit increases from $3,500 to $5,000. Both of these catch up contribution limits will be indexed to inflation starting 2025.
The Act also expands access to retirement funds, allowing participants to withdraw up to $1,000 (once a year) from retirement savings for emergency personal or family expenses without incurring the 10% early withdrawal penalty (starting Jan. 2, 2024). Furthermore, victims of a qualified, federally declared natural disaster are permitted to withdraw up to $22,000 from their retirement account without penalty, with the withdrawal treated as gross income over three years (effective as of the passage of the bill). Survivors of domestic abuse may withdraw the lesser of $10,000 or 50% of their retirement account without penalty (starting Jan. 2, 2024). Employees may also establish Roth emergency savings accounts with up to $2,500 per participant (starting Jan. 2, 2024).
The SECURE Act 2.0 aims to address retirement shortfalls through comprehensive legislative changes. Retirement savings and distribution rules will be subject to changes over the next few years, and incorporating these new provisions into retirement plans may prove challenging. This article does not cover all of the provisions of the SECURE Act 2.0 but touches on a few of the pertinent changes. If you require assistance in understanding how these changes affect your retirement plan, please do not hesitate to contact us, as The Normandy Team is committed to helping you achieve your retirement goals.
Derek Landis, CFP®
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