“Change is the only constant in life.” This phrase – attributed to Greek philosopher Heraclitus – is particularly relevant when it comes the recent changes to retirement savings in the United States. The Federal Government funding bill (which is over 4,000 pages long!) includes provisions from the prior proposed Setting Every Community Up for Retirement Enchantment (SECURE) Act 2.0 that will significantly change the way Americans save from retirement.
With that, let’s review some of those changes – specifically the “So What” that comes along with these changes. As we can expect in a law that is less than a week old, there are still a lot of unanswered questions on the HOW some of these changes will be implemented as well as the nuances as to WHEN each of these new laws are supposed to be put in effect (very few are scheduled to take effect right away in 2023).
To start, we will divide the changes based on who they are targeted at, based on life and career stage. Here is a quick summary of those main changes:
For those in retirement:
- The Required Minimum Distribution (RMD) starting age will be increased to 73 starting in 2023 and 75 in 2033.
- The penalty for missed RMDs will be decreased from 50% to 25% in 2023.
- Employer sponsored retirement plans with a Roth account will no longer be subject to RMDs starting in 2024.
- A one-time Qualified Charitable Distribution (QCD) will be allowed for Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs)starting in 2023.
For those nearing retirement:
- The IRA catch-up contribution will be indexed to inflation starting in 2024.
- A new “super catch-up” contribution will be available for those ages 60-63 in employer-sponsored retirement plans starting in 2025.
- Catch-up contributions must be made to Roth accounts for those who made over $145,000 in the previous year starting in 2025.
For those in the early- to mid-career stages:
- Automatic enrollment in new employer-sponsored plans will be mandatory starting in 2025.
- Automatic rollovers between employer-sponsored plans will be allowed starting in 2025.
- Employers will be able to offer Emergency Savings Accounts of up to $2,500 per year starting in 2024.
- Employers will be able to make matching contributions to retirement plans to match student loan payments starting in 2024.
For education savers and beneficiaries:
- A portion of overfunded 529 plans can be rolled over to Roth IRAs in the name of the 529 beneficiary starting in 2024.
For those in retirement: More changes to Required Minimum Distributions
RMD Age Increased
Starting in 2023, Required Minimum Distributions (RMDs) are required in the year you turn 73 (previously 72 in 2022). In 2033, the starting age for RMDs will be increased to 75. This means that if you turn 72 on or after January 1, 2023 and 73 before January 1, 2033, your applicable age to start RMDs is 73. If you turn 75 on or after January 1, 2033, your applicable age to start is 75. This delay in RMDs allows for more years to control your income based on your needs and not mandated withdrawals, as well as increased years for proactive tax planning.
RMD Penalties Decreased
The new law also reduces the 50% penalty for missed RMDs to a less severe 25% penalty in the event that any portion of an RMD is missed in the year it is required to be distributed. It also reduces the penalty further to 10% in the event of prompt payment and acknowledgement of the missed RMD. This reduced penalty goes into effect in 2023.
RMDs for Employer Roth Accounts Waived
Starting in 2024, employer Roth accounts (such as 401(k)s, 402(b)s, and TSPs) will not be subject to RMDs – just like Roth IRAs. However, if you have funds in a Roth 401(k) and are 73 or over in 2023, you still have to meet your 2023 RMD in that account. This removes the urgency to roll over employer Roth 401K accounts into Roth IRAs as you near your RMD age and adds more flexibility in account ownership in retirement.
QCDs Expanded to CRUTs and CRATS
As of 2023, Qualified Charitable Distributions (QCDs) can be used to fund Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs) with a one-time gift of up to $50,000. Previously, QCDs to these trusts were not allowed. The new law does put two significant limitations to this opportunity however. First, stating that the QCD distribution must only be to a CRUT or CRAT that “is funded exclusively by qualified charitable distributions”. Secondly, all distributions to the trust beneficiaries will be classified as ordinary income, removing more tax preferred distributions of capital gains or qualified dividends like a “standard” CRAT or CRUT. Bottom line, there is an opportunity, but with a number of strings attached that may limit its usefulness to many.
For those nearing retirement: Opportunities to save more, but with complications.
In prior years, through 2023, the catch-up contribution for IRAs for those over 50 years old was held static at $1,000. A 55-year-old can contribute up to $7,000 ($6,000 base plus the $1,000 catch-up) in an IRA for tax year 2022. Starting in 2024 that catch-up limit will be indexed to inflation. This is an effort to increase that limit over time to better reflect its impact to savers getting ready for retirement. This won’t create a significant increase in the amount available year to year, but aligns it more so with other limitations that are indexed to inflation, allowing it to increase over time. For those looking to maximize this savings every year, you will need to verify the new annual value each year.
SECURE 2.0 introduces a new category of catch-up contributions, the “Super Catch-Up”, for those ages 60-63 in 401(k)s, 403(b)s, and the Thrift Savings Plan. Current law allows in 2023 a catch-up contribution in these accounts of $7,500 (on top of the standard limit of $22,500 for a total of $30,000). Starting in 2025 those in that narrow age range are eligible to contribute a catch-up of $10,000 or 150% of the standard catch-up. Starting in 2026 this Super Catch-Up is adjusted for prior year’s inflation rate. In effect this creates three tiers of contribution limits in these employer sponsored plans based on ages:
- Under 50: Base Contribution ($22,500 in 2023);
- 50-59 and 64+: Base plus Standard Contribution ($22,500+$7,500 in 2023);
- 60-63: Base plus the Super Catch-Up.
Bottom-line, as you near retirement you can potentially add even more to your employer sponsored retirement plans, but have to be vigilant of your specific applicable limits each year.
Catch-Ups Forced to Roth
With this one the new law gives us another significant complication. Starting in 2024 all catch-up contributions, that’s anything above the base contributions for that account type, must be done into a Roth account. Funds in a Roth account are a powerful thing for your financial future, but with a Roth contribution you have to pay the tax now. This takes away the opportunity to take pre-tax deductions on catch-up contributions for those in higher tax brackets. This only applies to those individuals with wages over $145,000 in the prior year. To help paint that picture a bit, let’s say you are 55 years old in 2024 and made $185,000 in wages in the prior year, 2023. In 2024 you can fund your 401(k) up to $30,000 (assuming no changes from 2022 limits for illustration purposes). But that $7,500 of catch-up contributions would have to be made to the Roth 401(k) and you would be on the hook for those income taxes in 2024. This is one of the key “revenue generators” included within the bill, and has some of the biggest questions on the HOW this would be put into practice. This provision makes the importance of a holistic planning approach, ensuring to balance your past, current, and future tax situation, current assets, and lifestyle plan even more important in making the decision to contribute catch-up funds to your employer plans.
For those in the early- to mid-career stages: More changes to your employer sponsored plans (401(k), 403(b), Thrift Savings Plan).
Starting in 2025, new employer plans (yes, just for any new plans) are required to automatically enroll employees starting at a minimum of 3% contributions. Many employers already have automatic enrollment with a gradual increase over a timeframe, but up until 2025 it is optional for employers. Automatic enrollment has been found to be a great tool in helping individuals start to save for retirement. If you are already diligent to ensure you get your employer match this is a no-change change; however, if you change employers make sure you read the plan documents carefully to determine its specific contribution increase path to avoid any surprises down the road.
The new law allows for 401(k) providers to automatically move your old 401(k) from a prior company to your new employer’s plan starting in 2025. This is an attempt to combat the “lost 401(k)” issues some individuals experience as they move from one company to another and potentially leave behind retirement savings. This is another item with many unknowns around HOW this would be realistically completed. Considering the questions on how this would be put in practice, it is still recommended that you carefully track prior accounts in employer sponsored plans and rollover to either a Rollover IRA or your new employer plan as appropriate for you.
Establishment of an Emergency Savings Account
To help employees save for emergencies, and reduce the reliance on hardship withdrawals from retirement accounts or taking on debt, the new law introduces an option for employers to offer an Emergency Savings Account starting in 2024. This would be savings in an after-tax basis, so no pre-tax deduction for these contributions. This would be limited to contributions of $2,500 per year and 4 withdrawals per year. If you find yourself struggling to meet your emergency savings needs, this may be a good tool for you to automate that deduction to the account and avoiding the need to reach into your 401(k) or short-term debt to fund those surprises.
Student Loan Match
This targets those individuals that are not contributing to retirement savings through work due to needing the cash flow to pay off student loans. Starting in 2024 companies can match student loan payments in retirement plans, like they would if the individual was contributing directly to the retirement plan up to the companies match. This would allow those in this position to start building some retirement savings and take advantage of compounding over a longer timeframe.
Many of these provisions are optional, not mandatory, to the employer to include. If there is a provision that you are particularly interested in and want included in your company’s plan be proactive and reach out to your Human Resources point-of-contact and let them know.
For education savers and beneficiaries: There is more flexibility with savings in 529 Accounts.
529 Rollover Option
This provision has the potential to affect you across the life stages. 529s can be a great tool to save for education related expenses. Recently the 529 options were expanded to allow for expenses for K-12 and trade schools, in addition to college. However, in the event of overfunding a 529 there were limited options to get money out of the 529 without penalties. The new law, starting in 2024, allows extra funds in a 529 account to be rolled into a Roth IRA owned by the 529’s beneficiary. There are, of course, limits in place: you can only make contributions up to the individual IRA contribution limit ($6,000 in 2022), there’s a lifetime cap of $35,000, and the 529 must have been open for at least 15 years.
To illustrate this, let’s assume a grandparent established a large 529 when their grandchild was born. That grandchild graduates in 2025 with a bachelor’s degree and is done with schooling, and there is $15,000 still in the 529. One option that has been used widely is reassigning that 529 to another individual, like another grandchild. With the new law the grandparent could instead use the 529 funds to make a Roth IRA contribution on behalf of the grandchild in 2025, 2026, etc. until those funds run out. This new provision could provide for some new and unique opportunities for families both in the event of excess funds and in the development of a gifting strategy prior to education. However, this is another of the provisions that has a lot of questions in terms of the HOW we will see this put into practice going forward.
In Conclusion (for now):
This is by no means a comprehensive list of changes within the bill, but hopefully, it provides insight into the potential impacts from some of the major provisions of the new law and how they may affect our financial lives.
With change comes opportunities. By leveraging a financial plan that encompasses all parts of your financial life, these new “tools” can be thoughtfully put to use to reach your unique goals.