The Consolidated Appropriations Act of 2023, commonly referred to a SECURE 2.0, is headed to President Biden for signature. The bill follows the SECURE Act that passed in 2019 and involves a litany of changes to how retirement plans will function in the future.

These are the provisions that are most likely to affect you.

Required Minimum Distributions (Starts immediately)

Distributions from pre-tax retirement accounts (IRAs, 401ks) were required to begin at age 72. Going forward, they will begin at 73 if you were born before 1960 and 75 if you were born after 1960.

RMDs will no longer be required for Roth employer retirement plans, just as they aren’t required for Roth IRAs.

The penalties for not taking your RMD will be reduced from 50% to 25%, or as low as 10% if you correct the mistake within a certain amount of time.

Planning tip: The years between retirement and when you begin RMDs typically present a great opportunity to do detailed cash flow and tax planning. Strategically funding your living needs from certain types of assets can reduce your taxes and extend the longevity of your assets.

Planning tip: Qualified Charitable Distributions (QCD) are tax-free gifts made to charity directly from your IRA. The age at which you can start QCDs remains at 70 and a half and is not impacted by the change to RMD age. The annual limit for QCDs is currently $100,000 a year and will begin to increase with inflation starting in 2024.

Employer Contributions to Roth Accounts (Starts immediately)

Many employers offer Roth retirement plans, like Roth 401(k)s. These plans do not offer a current-year deduction for contributions made to the plan but all future growth in the account could be tax-free, as no tax is due when taking future distributions from the plan. Historically, only employees were allowed to contribute to the Roth plan. Employer contributions had to go into the pre-tax 401(k) plan, from which future distributions would be taxable. The new legislation makes it possible for employers to make their contributions to the Roth part of the plan.

Planning tip: If you elect that employer contributions will go into your Roth employer plan, the amount your employer matches will be taxable income to you that year.

Catch-up Contributions for IRAs to increase annually (Starts 2024)

IRA owners over age 50 can currently contribute an extra $1,000 a year to their IRA or Roth IRA. The $1,000 amount has been fixed but will now increase by inflation, increasing the catch-up amount annually.

Catch-up Contributions in Employer Plans from age 60 to 63 (Starts 2025)

Retirement plans allow for an additional $7,500 of annual contributions for taxpayers age 50 and older. This makes their total contribution limit $30,000 when added to the normal contribution limit of $22,500. For participants who are 60, 61, 62 or 63, the $7,500 catch-up contribution limit increase to the greater of $10,000 or 150% of the regular catch-up contribution.

Catch-up Contributions in Employer Plans for High Income Earners (Starts 2024)

Employees that earn more than $145,000 a year from one employer will be required to make their catch-up contributions on an after-tax basis to the Roth retirement plan.

Planning tip: If you are a high-income earner, you will not be eligible to deduct catch-up contributions from your current year income.

Planning tip: Not all employer plans offer a Roth as part of the plan. If your employer doesn’t offer a Roth option, no employees will be allowed to make any catch-up contributions to the plan, even if they are not high-income earners. This is likely to cause more employer plans to adopt a Roth option as part of their retirement plan offering.

Planning tip: These catch-up contribution rules do not apply to IRAs or to self-employed individuals.

Planning tip: If you are eligible for higher catch-up contributions in your sixties but are also a high-income earner, catch-up contributions will need to go into your Roth plan.

Waiver of 10% Penalty of Early Distributions from Retirement Plans (Starts 2024 to 2026)

There are certain reasons you can take money out of a retirement plan before 59 and a half that escape the 10% early withdrawal penalty. These exceptions have been expanded to include a $1,000 withdrawal for unexpected emergencies, withdrawals for those who are terminally ill and victims of domestic abuse. The law also allows for $2,500 per year to come out retirement accounts penalty-free to pay for long-term care insurance for the taxpayer (and spouse if they file a joint tax return).

New Ways to Qualify for an Employer Retirement Plan Match (Start 2024)

For non-highly compensated employees, a new Emergency Savings Account can be created and linked to your company retirement plan. You can build a balance of up to $2,500 that must be held in cash-like investments and the account would be accessible without a 10% early withdrawal penalty.

Planning tip: These contributions will be eligible for employer retirement plan matching allowing people to build some savings without sacrificing a company match.

Employers will be allowed to treat payments made on student loan balances as contributions to the employer’s retirement plan for matching purposes.

Planning tip: If you don’t have enough income to pay your student loans and save in your retirement plan, this would enable you to receive a company match while you pay down your loans. This is an employer-by-employer provision so it may or may not be offered to you.

Rollovers from 529 Plans to Roth IRAs (Starts 2024)

In very specific circumstances, education plans known as 529 plans may be able to be rolled over to a Roth IRA. The lifetime limit is $35,000 which would need to happen over multiple years.

Planning tip: If you have unused money in a 529 plan, you may be eligible to move it to a Roth IRA depending on several factors related to your plan.

Backdoor Roth IRA Contributions – No Change

High-income earners who make too much to contribute directly to Roth IRAs can still use the two step-method of contributing to an empty IRA and converting the balance to a Roth. High income earners can still do Roth conversions.

Numerous other changes are included in the legislation. If signed into law, most of the changes do not take effect immediately and those that do require employers to make amendments to their plans which will take time. Nevertheless, now is an important time to explore how these changes will affect your plans before and during retirement.

**(SECURE Act 2.0 was signed into law on December 29, 2022)**