SECURE 2.0 Act: What You Need to Know

On December 29, 2022, the SECURE 2.0 Act was signed into law. The new legislation aims to strengthen the retirement system and help bolster Americans’ financial readiness for retirement.

Key updates in the SECURE Act allow clients to start withdrawing their required minimum distributions (RMDs) at a later age without penalty and encourage greater retirement saving strategies. Provisions also offer financial incentives for businesses to support their employees’ retirement planning and contributions.

Are you ready to help your clients take advantage of SECURE 2.0 as it goes into effect? In this article, you’ll find an overview of the changes in the SECURE Act and how you can best support your clients as they prepare for retirement.

What Is the SECURE 2.0 Act?

SECURE 2.0 Act, or "Securing a Strong Retirement Act of 2022," is an update to the prior SECURE Act of 2019, designed to bolster Americans’ financial readiness for retirement.

RITA reports 1 out of 3 workers aren’t confident they’ll have enough saved to live comfortably when it’s time for them to retire. Only 54% have a retirement strategy in place, and 43% of workers simply guess how much they will need. Of those who haven’t retired yet, 60% say they aren’t comfortable managing their IRA or 401K on their own. Yet, more Americans reach this threshold all the time, with around 10,000 Baby Boomers turning 65 each day.

The federal government passed the SECURE Act to help increase retirement savings, especially for part-time employees and low-income individuals. Setting every community up for future preparedness reduces the strain on taxpayers in the future and helps achieve a more balanced system. The new provisions help broaden the number of workers who are eligible for retirement plans and able to contribute to retirement savings.

Why Was the SECURE Act Updated?

Changes put in place by Congress in SECURE 2.0 Act attempt to address gaps in the original SECURE Act of 2019 or to further encourage more individuals and employers to contribute to retirement plans. 
Among other changes, the new update includes requiring auto-enrollment for retirement plans, increasing employer-sponsored matching flexibility, reducing penalties for failing to take an RMD on time, and increasing RMD age eligibility. 

The SECURE 2.0 Act also updates how much employees can contribute to their retirement savings accounts, offers increased tax savings for small businesses, and increases the maximum amount for employer contribution matching.

What Does the SECURE Act Do?

Incentives within the SECURE 2.0 Act encourage catch-up contributions and better retirement benefits from employers. Some key features of the SECURE 2.0 Act include increasing the age at which retirees must begin taking required minimum distributions (RMDs) from IRA and 401(k) accounts and changes to the size of catch-up contributions for older workers with workplace plans. 

Additional changes allow people to save for emergencies within retirement accounts, enable easier retirement account movement from employer to employer, and help younger people save more while paying off student debt. The goal of the SECURE Act is to prevent older Americans from prematurely using up their assets and outliving their wealth.

When Does the SECURE Act 2.0 Take Effect?

The SECURE 2.0 Act 2.0 is already law.  On December 29, 2022, the Securing a Strong Retirement Act, H.R. 2954 (SECURE 2.0 Act) was signed into law as part of the Consolidated Appropriations Act and omnibus spending bill. Some SECURE 2.0 Act changes are effective immediately: the age change for RMDs, shifting from 72 to 73, went into effect on January 1, 2023. Some of the changes will take more time to roll out: the age for RMDs is slotted to eventually extend to 75 by 2033. 

Many people will expect their tax professionals and financial advisors to understand how the new law impacts their situation and what they need to change as a result. Therefore, it’s important to understand how to help your clients take advantage of new opportunities created by this Act.

SECURE 2.0 Summary: 3 Key Changes to Know

While this list is not exhaustive, here are the three key ways that the SECURE Act 2.0 is changing the retirement landscape: retirement contribution limits, RMDs, and beneficiaries of inherited IRAs. 

1. What are the 2023 Retirement Contribution Limit Increases?

Changes to rules surrounding 2023 retirement contributions can be found on the IRS website. The new contribution limit increases include several key changes that could impact your clients.

• IRA contribution limit 
  For 2023, Traditional IRA and Roth IRA contribution limits have increased from $6,000 to $6,500. The IRA catch-up contribution for individuals age 50 and older remains unchanged at $1,000.
• Salary deferral limit for employer-sponsored retirement plans
  For 2023, the maximum salary deferral limits for 401(k), 403(b), most 457 plans, and the federal government’s Federal Thrift Savings Plans and 457(b) plans have increased from $20,500 to $22,500.  The salary deferral catch-up contribution for individuals age 50 years and older has increased from $6,500 to $7,500.
• SEP IRA contribution limits
  Contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation or $66,000 for 2023, an increase from $61,000 in 2022.
• SIMPLE IRA deferral limits
  The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500 from $14,000. For employees aged 50 or older, a $3,500 catch-up contribution is also allowed.

2. How Does SECURE 2.0 Affect RMDs?

Some of the biggest changes brought about by the SECURE Act 2.0 surround how clients are impacted by required minimum distributions (RMDs).

• Age requirement change
  The age at which retirement account owners must begin taking RMDs has increased from 72 to 73, effective in 2023.
  • Individuals who turned 72 in 2022 or earlier will need to continue to take RMDs as scheduled.
  • If an individual who turned 72 in 2022 and delayed their RMD until 2023, they are still required to take their 2022 RMD by April 1, 2023, plus take their 2023 RMD by December 31, 2023.
  • The SECURE 2.0 Act eventually increases the beginning RMD age to 75 starting in 2033.
• Lowered penalties
  Starting in 2023, penalties for individuals who fail to take their RMD will decrease from 50% to 25% of the RMD amount not taken. The penalty is reduced to 10% for IRA owners if corrective action is taken in a timely manner.
• Roth plans
  Starting in 2024, Roth accounts held in employer retirement plans will be exempt from RMD requirements.
• QLACs
  Qualified Longevity Annuity Contracts (QLACs) are used to defer income from RMDs. The SECURE 2.0 Act increases the premium amount an individual can transfer from an IRA to a QLAC to $200,000 (up from $125,000) and removes the 25% cap.

Please check with your client’s custodian on any updates that may need to be made on behalf of your client’s RMD. 

3. What Are the Changes for Beneficiaries of Inherited IRAs?

Beneficiaries who are not considered eligible designated beneficiaries (EBDs) and subject to the 10-year rule will now be required to take distributions in years 1 through 9 and then deplete the account by December 31 of the 10th year of death. 

Per IRS Notice 2022-53 (which has not been published but indicates the intent to issue final regulations), beneficiaries who failed to take distributions in 2021 and 2022 will NOT be subject to a 50% penalty. The IRS has not yet issued any guidance or instruction indicating that those who did not take distributions in 2021 and 2022 are required to make up those distributions.

5 Other Ways the SECURE Act 2.0 Could Impact Your Clients

Whether your clients are small business owners or employees, here are five examples of how this new law could impact your clients or their businesses.

1. Employer Enrollment and Matching

• Enrollment
  For employers without existing retirement plans who are starting new retirement plans in 2024 or after, they will be required to provide automatic enrollment for employees in retirement plans with a matching of at least three percent of their eligible wages.
• Roth matching
  Effective in 2023, employers will be able to make matching contributions of after-tax earnings to an employee’s Roth retirement account instead of only an account for pre-tax wages. Using a Roth allows earnings to grow in a tax-free account. Though this could take time to be put into place by employers, your clients may benefit from looking into Roth account options.
• Part-time workers
  Employers are required to offer long-term, part-time workers access to their company 401(k) plans. Starting in 2025, employees working two consecutive years for at least 500 hours per year are eligible for this benefit.
• Saver’s Credit replaced by Saver’s Match
  Additionally, in 2027, the federal government will stop offering the Saver’s Credit and start offering the new Saver’s Match option. Your clients will be able to pick if their retirement savings are matched within the account of their choice or applied as a tax credit. The account can’t be a Roth, and the matching contribution from the government won’t count against the annual contribution limit.

2. Catch-Up Contributions

For individuals who may have started saving for retirement years later than their peers or found that their initial savings goals were too low, as they near retirement age, they can add more money to their retirement plans. These catch-up contributions offer an opportunity to increase both IRA and salary deferral (e.g., 401(k), 403(b), 457) contributions for retirement funds. 

Starting in 2025, the catch-up contribution limit escalation will reach $10,000 total contribution annually for those ages 60 – 63. The current law caps the catch-up limit at $7,500 for those over the age of 50. 

3. Qualified Charitable Distributions (QCDs)

Qualified charitable distributions (QCDs) allow individuals to donate to their favorite nonprofits from their taxable IRA distribution instead of taking an RMD. The QCD doesn’t qualify for a tax deduction—however, it does allow donors to lower their taxable income.

The SECURE Act 2.0 allows those over the age of 70½ to make QCDs up to $100,000 each year to 501(c)3 organizations, keeping the age requirement the same while expanding the type of charities that are eligible for this tax-free contribution.

4. Emergency Savings

People can face devastating financial crises when they aren’t prepared to handle emergency expenses. According to the Consumer Finance Protection Bureau, 24% of Americans don’t have anything set aside for savings, and 39% say they have less than a month’s income held back.

Newly defined in the SECURE Act 2.0, clients may use a designated Roth account for building their emergency savings without typical early withdrawal fees. Starting in 2024, contributions for non-highly compensated employees would be limited to $2,500 and may be eligible for employer matching (depending on the plan rules) with limited penalty-free withdrawals. The first four withdrawals from the emergency savings account each year will not be penalized, incentivizing participants to save for unexpected expenses, emergencies, and short-term needs.

5. Student Loan Repayment

Student loan debt is a hot topic in the U.S. with the average student owing around $40,000 and the national student loan debt continuing to increase. The recent changes to the SECURE Act allow benefit plans to provide more flexibility in what employers can match in hopes of encouraging students to repay those debts.
Starting in 2024, employers can choose to match retirement contributions to employee student loan payments. This change from the SECURE Act 2.0 provides an incentive to encourage workers to pay off student debt without hurting their retirement savings.

How to Discuss SECURE Act 2.0 With Your Clients

Many of your clients may have already asked about SECURE 2.0, as it reached news headlines in the past year. 

Most clients are looking to learn from you how the changes will affect their retirement plans. 

Skip the lengthy breakdown and the legal lingo, instead answer in simple terms your clients’ ultimate question: “How will these changes affect me?”

You may also take this opportunity to talk about retirement planning with your clients who aren’t already doing their retirement planning with you. 

Here are a few tips to get the ball rolling on discussions surrounding retirement planning:

• Start by understanding your client’s goals and listening to their concerns.
• Understand how recent legal changes are set to impact IRAs and employer retirement plans.
• Look for how clients could take advantage of SECURE Act 2.0 changes.
• Craft strategic and personalized suggestions to proactively bring to your clients.
• Keep your clients updated with any changes that could affect their plans.

While the SECURE 2.0 Act and 2023 contribution limit increases provide additional opportunities to save for retirement, every investor’s financial situation is different. As always, please consult a tax professional to understand how these changes apply to you and your clients.

We hope you find this information helpful. If you’re already working with AssetMark please reach out to your dedicated Relationship Manager with any questions. If you’re not working with AssetMark you can always request a consultation to learn how we can support you and your clients.