SECURE Act 2.0 Now Law: How It’s Likely to Change Your Retirement Planning

Whether you’re a few years from retirement or decades away, dozens of new rules in the long-awaited SECURE Act 2.0 of 2022 could have a significant impact on the way you plan, invest, and withdraw your nest egg.  

Signed into law December 30, 2022 by President Biden as part of an omnibus spending bill, ‘SECURE 2.0’—the latest update to 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act—could have the greatest impact for workers enrolled in qualified employer retirement plans.

Here are some major provisions of SECURE Act 2.0 and the year they become effective. Please note that the IRS may issue regulations that could reshape these rules over time. When that happens, we’ll update the following. 

Effective 2023

• RMD Age Goes Up to 73: For many, SECURE Act 2.0 will have the greatest impact for providing more time for workers to accumulate retirement assets before they have to start mandatory withdrawals, known as required minimum distributions (RMDs). RMDs are required in traditional, SEP-IRA, or SIMPLE IRAs, and qualified retirement plans. Formerly set at age 72, RMDs must start at age 73 in 2023, rising to age 75 in 2033. Note: If you’ve inherited an IRA from a spouse who would’ve turned 72 in 2023, you can now delay taking RMDs until their 73rd birthday in 2024.

• RMD Penalties Go Down: If you fail to take your RMDs on time in 2023, it will still sting—but not as much. That penalty now drops from 50% of the RMD amount not withdrawn on schedule to 25%. That penalty will shrink to 10% for IRA holders if they withdraw the RMD amount that hadn’t been taken and submit a corrected tax return in a timely manner. Also, if you turned 72 in 2022 but delayed your first-year RMD until 2023, remember to start your RMDs by April 1, 2023.

• Big Changes in Roth Contributions, Part 1: If you either have or plan to invest in an employer-sponsored Roth 401(k), now might be a good time to refresh your knowledge. Employers already can elect to match Roth 401(k) contributions just as they would with ordinary 401(k)s. However, before this new law, those matching Roth funds would have to be placed in an ordinary 401(k) on a pre-tax basis. In 2023, employers can let workers choose whether their matching amount will go directly into an ordinary 401(k) or a Roth. Also, the new law adds SEP-IRAs and SIMPLE IRAs to the list of employee plans that are allowed to accept Roth contributions. Employers considering Roth matches or contributions should contact their payroll provider for W-2 guidance and know that plan documents and operational updates will be required before vendors can offer Roth contributions to a SEP-IRA or SIMPLE IRA.

• Emergency Withdrawals Get a Boost: Employees will be able to withdraw up to $1,000 per year from their qualified employer 401(k) plan penalty-free for emergencies—as long as they repay those funds within three years. Income tax is still due on the withdrawal, but without the typical 10% penalty, employees under age 59 1/2 would have to pay. There is one hitch, though. If the withdrawal is not repaid within three years, employees will be required to wait until the three-year period ends before being allowed to make another emergency withdrawal.

• New 3-Year Repayment Rule for Adoption, Birth Expense Plan Withdrawals: The previous SECURE Act allowed employees to withdraw retirement funds for qualified birth or adoption expenses without the typical 10% penalty and no repayment deadline. Now, there’s a three-year deadline for full repayment to avoid the penalty.

• Early Withdrawal Penalties Waived for Terminal Illness in ’23, Other New Events in ’24: SECURE Act 2.0 adds four new exceptions to the 10% early withdrawal penalties starting with terminal illness in 2023 and cases of domestic abuse, financial emergency, and natural disaster in 2024. Consider reviewing the rules for each of these situations to see if you qualify and note that some have specific penalty-free withdrawal limits.

• New Rules for Using IRA Distributions for Charitable Giving: For individuals who use charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts to make charitable contributions, SECURE Act 2.0 allows a one-time gift of up to $50,000 to those vehicles. Also, the current $100,000 limit for qualified charitable distributions (QCDs) will now be indexed for inflation. 

Effective 2024

• Big Changes in Roth Contributions, Part 2: Starting in 2024, RMDs will no longer be required from any Roth accounts in a qualified employee retirement plan. In addition, 401(k) employee catch-up contributions must be made as Roth 401(k) contributions—not pre-tax salary deferrals—for those who make at least $145,000 from the employer sponsoring the plan. Warning: If the 401(k) plan does not allow Roth contributions, then no employee will be allowed to make catch-up contributions. However, stay tuned as reports indicate this consequence is now under review as it appears to be unintended.

• Employers Can Offer a Retirement Match Against Student Debt Payments: Qualified employer retirement plans can elect to make a matching contribution to an employee based on their qualified student loan payments. This enables workers to invest for retirement while they pay off college debt.

• Annual Catch-Up Increases Now Linked to Inflation: Annual retirement catch-up contribution increases have been limited to $1,000, but in 2024, catch-up increase limits will be tied to inflation.

• Eligible Part-Time Workers Can Join Retirement Plans Sooner: The new rules allow part-time employees with at least two years of service and working at least 500 hours per year the opportunity to join a qualified employer plan like a 401(k). Previously, workers had to put in three years of service.

Effective 2025

• Higher Catch-Up Limits for Those Aged 60–63: SECURE Act 2.0 added some turbocharging for qualified 401(k) investors aged 60–63. Starting in 2025, this particular age group will be able to contribute an additional 50% of the regular 401(k) catch-up limit available to all taxpayers older than 50.  

• Auto-Enrollment in Employer 401(k) Plans: Some companies already do this electively, but the new legislation requires employers to automatically enroll their employees with an opt-out feature if workers don’t want to join. SECURE Act 2.0 sets the minimum contribution at 3% and the maximum at 10% with an automatic contribution escalation rate of 1% per year to get the employee up to a minimum 10% employee contribution but not more than 15%.

To help you learn more about SECURE Act 2.0, The Ticker Tape will be updating current articles to reflect the latest changes in this law.

TD Ameritrade does not provide tax advice. We suggest you consult with a qualified tax-planning professional with regard to your personal circumstances.