What Is Secure Act 2.0?
If you'll recall, the original Secure Act was passed at the end of 2019. It raised the Retired Minimum Distributions (RMD) age to 72, limited Stretch IRAs to just 10 years, allowed you to pay off $10,000 of your student loans with a 529 plan, and mostly encouraged employers to provide better 401(k)s. Secure Act 2.0 provides additional changes, almost all of which are great for savers, investors, employees, and employers. Let's go over them.
There are so many changes that this post could be thousands of words long. To make your job easier, I have only included the changes that I think every investor should be aware of. There are 90 sections in this act, and I think you need to know about 32 of them. Sorry that it's so long and there are so many changes. I don't make the rules; I just tell you about them and help you interpret them.
Section 101: Expanding 401(k)/403(b) Automatic Enrollment
All new 401(k)s must automatically enroll participants to contribute at least 3% and not more than 10% and automatically increase contributions 1% per year to 10%-15%. Participants can still opt out. Starts in 2025.
Sections 103 and 104: Changed Saver's Credit to Saver's Match
The Saver's Credit, for low earners contributing to retirement accounts, is no longer a deduction but a federally funded match into the account. It can be as much as a 50% match on the first $2,000 contributed (so, $1,000 total) and phases out between $20,500-$35,500 ($41,000-$71,000 MFJ). This is one more reason for residents—at least married residents—to contribute to their Roth IRAs. The match has to be repaid to the Treasury if you pull the money out before retirement. Starts in 2027.
Section 107: RMD Age Goes Up
Starting in 2023, you will have to start taking RMDs from your traditional IRAs, traditional 401(k)/403(b)s, and Roth 401(k)/403(b)s at age 73. Starting in 2033, the age will increase to 75.
Section 108: IRA Catch-Up Contributions Indexed to Inflation
Instead of just being a flat $1,000 extra, the additional amount those 50+ can contribute to an IRA each year will be indexed to inflation. Starts in 2024.
Section 109: Higher Catch-Up Contributions in Your Early 60s
For those who are 60-63 years old, 401(k) catch-up contributions will not just be the $6,500 that those 50+ can make. It will be the greater of $10,000 or 50% more than the current catch-up contribution. Right now, that's $10,000 ($6,500 * 150% = $9,750), but since this is indexed to inflation, it could eventually be more. This also applies to SIMPLE IRAs (where the catch-up right now is only $3,000, not $6,500). Starts in 2025.
Section 110: Allows Employers to Match Student Loan Payments into 401(k)s
No longer do you have to miss out on the employer match if you choose to pay off your student loans instead of making 401(k) contributions. This also applies to 403(b)s, SIMPLE IRAs, and even governmental 457(b)s. However, this is up to the employer; it's not a requirement. Employers are just allowed to provide these matches. There will be a new nondiscrimination test just for those employees receiving these matching payments to ensure the benefits do not all go to owners/highly compensated employees. Starts in 2024.
Section 112: Small Employers Get Tax Credit for Making Military Spouses Immediately Eligible for DC Plans
To get this new credit of up to $500 ($200 a piece, plus up to $300 matching contributions) per military spouse employee, an employer must make military spouses eligible to use the 401(k) within two months of hire, make them eligible for any match they would have qualified for after two years, and make them immediately vested in the match. The credit applies for up to three years but does not apply to highly compensated employees. Starts in 2023.
Section 113: Employers Can Now Bribe Employees to Save for Retirement
You can now give employees a $10 McDonald's gift card (or similar) to bribe them to start saving for their own retirement in the 401(k) plan. This apparently wasn't allowed before. Starts in 2023.
Section 115: Emergency 401(k) and IRA Withdrawals Now Allowed Without Penalty
Unforeseeable or immediate financial needs relating to personal or family emergency expenses of up to $1,000 may now be withdrawn from a retirement plan without paying the 10% penalty (but still paying tax on tax-deferred money) up to once a year. You may also repay the $1,000 back into the plan (and presumably get a tax deduction for doing so) for three years. If you do repay it, you can do it again next year. If you do not repay it, you have to wait three years before taking another one. This one isn't going to do much for readers of this blog, but it should encourage low earners to save more for retirement without worrying about needing that money to replace the washing machine. Starts in 2024.
Section 116: Allow Employers to Put More into SIMPLE IRAs
Raises the possible match in a SIMPLE IRA from 2% of compensation (or 3% of compensation if a match) to 10% of compensation or $5,000 indexed to inflation, whichever is less. Starts in 2024.
Section 117: SIMPLE IRA and 401(k) Contribution Limit Increases
SIMPLE IRA/SIMPLE 401(k) contribution limits go up by 10% (including catch-up contributions). If the employer has 26+ employees, the employer must provide a non-matching contribution of at least 3% of compensation or a matching contribution of 4% of compensation in order for the plan to qualify for that increase. Starts in 2024.
Section 119: Rural Electric Employees Can Get Higher Employer Contributions
Non-highly compensated employees of a rural electric company now have a 415(c) contribution limit that is only limited by the 415(c) limit of $245,000, not by their compensation. So even if they only made $90,000, a worker could still potentially get $66,000 into their 401(k). Interesting loophole there. Starts in 2022.
Section 121: Introduction of Starter 401(k) Plans
A starter 401(k) (or safe-harbor 403(b)) can be started by an employer that does not currently offer a retirement plan, has a contribution limit equal to the IRA contribution limits ($6,500 in 2023 with $1,000 catch-up limits), and default-enrolls employees with a 3%-15% of compensation elective contribution. Starts in 2024. Not sure why an employer would choose a starter 401(k) over a real one, but perhaps it would be less hassle or less costly. This does not seem to replace the IRA contribution limit; it is just equal to it. Starts in 2024.
Section 124: ABLE Disability Age Increased
The old rule was that the person had to be disabled before age 26 to have an ABLE account established for them. Now it is 46. Starts in 2026.
Section 125: Part-Time Employees Now Eligible for 401(k) After 2 Years
Employees become eligible to use a 401(k)/403(b) after no more than one year of full-time work (1,000+ hours) or two years of part-time work (500+ hours per year). It was three years for part-timers. Starts in 2025.
Section 126: 529 to Roth IRA Rollovers Now Allowed
Once the 529 has been established for 15 years, 529 beneficiaries can roll up to $35,000 from their 529s into their Roth IRAs. This is not an addition to their annual contribution but a replacement for it. Basically, if you oversave for college, newly graduated students can use their $6,000ish per year for something besides Roth IRA contributions and still get their Roth IRA funded. This won't work for Backdoor Roth IRA contributions. This won't change what I do with leftover 529 money for most of my kids (that will go to the grandkids), but it will for leftover 529 money I have saved for nieces and nephews. Starts in 2024.
Section 127: Pension-Linked Emergency Savings Accounts
Employers can establish new tax-free accounts for their non-highly compensated employees called pension-linked emergency savings accounts. Employers can automatically opt employees in with up to 3% of their compensation. The first $2,500 put into this account by the employee sits there as an emergency fund. Once it hits $2,500, additional contributions go into the employee's Roth 401(k). Employers can match the contributions 1:1 up to $2,500. The first four withdrawals from the account each year are penalty-free. At separation, the money can be taken as cash (penalty-free), rolled into a Roth IRA, or moved into the Roth 401(k). Starts in 2024.
Title II: Annuities and Retirement Income
Title II is much smaller than Title I, but it includes four sections that make changes with annuities. I worry that a lot of the changes in these sections will cause complex, expensive annuities to be sold more frequently than they were before. This is a huge boon to annuity salespeople, as it now provides them with a whole new pool of money that can be used to purchase their products that are designed to be sold, not bought. I worry also that it will open up employers who allow bad annuities into their retirement plans to more employee lawsuits for inappropriate 401(k) investments (due to their fiduciary duty).
Section 201: Makes It Easier to Put Annuities into Retirement Plans
Eliminates an actuarial test that commonly keeps certain types of more complex annuities (return of premium, period certain, annual increases) out of retirement plans. I'm not so sure this one is a good thing for retirement savers, but it starts in 2022.
Title III: Retirement Plan Rule Changes
There are 50 sections in this title. Some don't matter much, but others may have a significant effect on your financial life.
Section 302: RMD Penalty Cut in Half
The RMD penalty (50% of what should have been withdrawn but wasn't) is one of the most onerous in the tax code. It was just reduced to 25%, starting in 2023.
Section 303: Creates a Retirement Account Lost and Found
Creates a national searchable lost and found online database for forgotten retirement accounts. Starts at the end of 2024.
Section 306: Eliminates “First Day of Month” 457 Rule
457s (and only 457s) had a dumb rule that required you to change your contribution rate before the first day of the month, even if the money for the contribution wasn't available until later in the month. That rule is now gone. Starts in 2023.
Section 307: QCD Improvements
The best way for older retirees to give to charity just got better. Qualified Charitable Distribution (QCD) annual limits ($100,000) are now indexed to inflation. Plus, you can make a one-time $50,000 charitable distribution, via a charitable trust or charitable annuity (split interest gifts). Starts in 2023.
Section 313: Establishes Statute of Limitations for Bad Contributions/Withdrawals
The old statute of limitations (three years in the case of bad withdrawals; six years for bad contributions) started when the taxpayer filed the form (Form 5329) stating they had done something bad. Now it starts three years/six years from the date of the original return, even if the taxpayer didn't realize they should have filed the excise tax form with the return. Starts in 2022.
Section 314: Domestic Abuse Penalty-Free Withdrawal
This adds yet another exception to the Age 59 1/2 rule: domestic abuse. The limit is $10,000 or 50% of the balance, whichever is less. Also applies to 401(k) withdrawals. The money can also be repaid (with a refund of taxes paid) for a period of three years. Starts in 2024.
Section 317: Solo 401(k)s Started After the Calendar Year Can Now Get Employee Contributions
I used to recommend that you use a SEP IRA if you don't get your solo 401(k) established by the end of the year. Now, you can just establish your 401(k) before your tax return date and still make employee contributions to it. No reason now to use the SEP IRA and mess up your Backdoor Roth IRA pro-rata calculation. Starts in 2023 (for 2023 contributions, not 2022 contributions.)
Section 319: Government Agencies to Review Reporting and Disclosure Requirements
The Treasury, Department of Labor, and Pension Guarantee Benefit Corporation will review reporting and disclosure requirements and report to Congress within three years. Oversight and review can be good things.
Section 322: Clarification of Penalty for Prohibited IRA Transaction
If you do a prohibited IRA transaction (like buying an investment not allowed in an IRA), the entire IRA is treated by the IRS as though you withdrew the entire balance even if the transaction was only a tiny fraction of the IRA. This clarifies that only that particular IRA is treated as distributed. So, if you're going to do something in a gray area, roll the money you're going to do it with into its own IRA. Starts in 2023.
Section 323: SEPP Rule Clarification
The Substantially Equal Periodic Payments (SEPP) exception to the 10% early withdrawal penalty will now be applied even if a rollover or annuity exchange occurs or if the IRA is invested into any annuity that meets the RMD rules. The rollover changes start in 2024, and the annuity changes start in 2023.
Section 325: No More Roth 401(k) RMDs
Roth 401(k)s (but not Roth IRAs) have Required Minimum Distributions (RMD). Starting in 2024, they won't.
Section 326: Terminal Illness Exception to 10% Early Withdrawal Penalty
Another new exception to the 10% Early Withdrawal Penalty (Age 59 1/2 rule) will be terminal illness starting in 2022.
Section 327: Surviving Spouse Can Elect to Be Treated as Employee for RMDs
The surviving spouse can now elect to be treated as the employee with respect to RMDs. This could reduce the RMD amount. Starts in 2024.
Section 331: Disaster Retirement Plan Withdrawal Rule Changes
You can withdraw up to $22,000 from retirement plans penalty-free in the event of a federal disaster. Taxes on that withdrawal can be spread over three years. The money can also be repaid into a retirement account. You can also repay any money you withdrew for a home purchase. Employers can allow a larger amount to be borrowed for a longer period of time from their retirement accounts in a disaster, too. This change is retroactive to January 26, 2021. I'm not sure what disaster happened that day.
Section 333: Corrective Distributions of Excess IRA Contributions No Longer Subject to Penalty
Another exception to the 10% early withdrawal penalty will now be corrective distributions of excess contributions and the earnings on those. Starts in 2022.
Section 334: Long Term Care Premium Exception to 10% Early Withdrawal Penalty
You can use up to $2,500 per year to pay long-term care premiums without paying the 10% early withdrawal penalty. Starts in 2026.
Section 337: Special Needs Trusts Can Have a Charity as the Remainder Beneficiary
Special needs trusts have special RMD rules (the ones that apply to the disabled person who is the beneficiary) but can now list a charity as the remainder beneficiary. Starts in 2023.
Section 338: Paper Benefit Statement Must Be Provided
Unless the participant opts out, an employer plan must send them their annual (every three years for defined benefit plans) benefit statement in paper form. Starts in 2026.
Titles IV and V
Includes some technical, clerical, and administrative amendments to the original Secure Act and Secure 2.0.
Title VI: Revenue Provisions
I'm really not sure why some important rule changes are in Title I, others are in Title III, and yet others are in Title VI. But we're not done yet.
Section 601: Roth SIMPLE and SEP IRAs
Now you can make Roth contributions to SIMPLE and SEP IRAs. Starts in 2023.
Section 603: Rothification of Catch-Up Contributions for High Earners
No longer will catch-up contributions for high earners ($145,000+, indexed to inflation) be allowed to be tax-deferred, They will have to be Roth contributions. This appears to be driven by a need to increase revenue to the government. Starts in 2024.
Section 604: Match Can Now Be Roth, Too
Employers can now allow the match dollars to go into the Roth subaccount of a 401(k), 403(b), or 457(b). This includes matches of payments on student loans. They will be taxable to the employee and immediately vested. Starts in 2022.
Whew! Here we are at the end of the Secure Act 2.0. There is a TON in there that changes the rules we have been playing by for years.
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