The Secure 2.0 Act and What it Means for Retirement Accounts

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On December 23, 2022., the Biden Administration signed the 2023 Omnibus Appropriations package into law. This funding bill contained the Secure 2.0 Act, which altered several important rules regarding 401(k)s, IRAs, and other aspects of the U.S. retirement system.

Here is a breakdown of the notable changes outlined in the new law:

Changes that Affect Retirement Accounts Via the Secure 2.0 Act

Increase in Required Minimum Distribution Age

Starting in 2023, the required minimum distribution age rose from 72 to 73. It is set to increase again on January 1, 2033, to 75. The penalty for not taking your required minimum distribution was also lowered from 50% to 25%.

Adjustments to Lifetime RMDs from Roth Accounts

Starting in 2024, you will no longer be required to take minimum distributions from designed Roth 401(k) accounts. The current rule requiring no lifetime regular minimum distributions for Roth IRAs will not change.

Inflation-based Adjustments to Catch-Up Contribution Limits

Anyone aged 50 and over may use the IRA catch-up provision to contribute up to $1,000 over the standard maximum. Starting in 2024, an inflation index will be added to this limit. This index may adjust yearly depending on the inflation rate defined by the federal government's cost-of-living increases.

Extended RMD Credit for Annuitized Qualified Accounts

Before introducing the Secure 2.0 Act, you could only count part of your qualified annuity account toward your minimum distribution requirements for the account's annuitized portion.

Now you can count extra annuitized distributions toward the required minimum distribution threshold for the remainder of your account. Additional guidance and further revisions may be forthcoming from the IRS soon.

Changes to QLACs

You may now purchase up to $200,000 in Qualified Longevity Annuity Contracts (QLACs). Before this change, purchases were capped at $145,000.

IRA Contributions Accepted for SIMPLE & SEP Plans

Starting this year, you can select a Roth option for your SIMPLE and SEP plans. This change applies to both employee and employer contributions.

Ability to Designate ROTH Contributions for Employer-Offered Portion

If you have a 401(k), 403(b), or 457(b) plan, you can now choose to have your employer contributions made to the designated Roth part of your plan.

Qualified Account Rollover Without 72(t) Invalidation

Starting in 2024, you may roll over your qualified accounts without invalidating Section 72(t) life expectancy distributions.

529 Rollovers for Roth IRAs

Starting in 2024, 529 account beneficiaries can begin to make limited tax-exempt rollovers. You will have to stay within Roth contribution limits, and you cannot exceed a lifetime limit of $35,000, which is cumulative. The rollover also counts toward your annual Roth IRA limit.

New Exceptions for Added Tax on Early Distributions

Starting in 2024, you will not have to pay the added 10% penalty on qualified account distributions taken before the age of 59.5 under the following circumstances:

You may take a distribution of up to $1,000 annually for a personal or family emergency expense. You can repay the distribution within three years from the disbursal. However, you may not take a second emergency distribution unless the first is repaid.

If you've experienced domestic abuse, you may withdraw up to 50% of your account or $10,000 (the smaller of the two). You may also pay this back within three years.

New Terminally III Exception for 10% Tax on Pre-59 ½ Distributions

You can now take distributions from a qualified account without incurring the 10% penalty before the age of 59.5 if a doctor certifies that you will likely die within the next 84 months due to an ongoing illness or physical infirmity.

New Exception on Distributions for Qualified LTC Covered

Starting in 2026, you may take up to $2,500 a year from your qualified plan distributions penalty free to pay for a qualifying long-term care (LTC) insurance plan.

Online Database Added to Find Missing Qualified Funds

The Secure 2.0 Act contains a provision to set up an online database that people can use to search for lost qualified funds. This database should be operational by 2025.

Questions?

Have questions about these changes may impact your retirement plan? Our team of experts is here to help. Contact us.