What the SECURE 2.0 Act Means for Your Retirement Savings

January 18, 2023

At the very end of 2022, President Biden signed the $1.7 trillion omnibus spending package which includes the SECURE 2.0 Act. SECURE 2.0 builds on The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, revising existing rules around retirement saving, including raising the age of Required Minimum Distributions (RMDs) and eliminating age limits for traditional IRA contributions.

Raising the Age of Required Minimum Distributions

Taxpayers now can wait to start taking required minimum distributions from requirement accounts at the age of 73 instead of 72. Due to certain confusion around the SECURE Act of 2019, the new Act gives some penalty relief for missed RMDs, lowering the penalty from 50% to 25% for missed distributions. The penalty drops to 10% if the missed RMDs is quickly corrected. The 10-year payout for IRAs inherited after 2019 is holding.

Exceptions Created for Early Retirement Withdrawal

SECURE 2.0 has created exceptions to the 10% penalty for early withdrawal before age 59 and 1/2 from 401(k)s or other pretax retirement accounts. The new law expands on exceptions for private firefighters and public safety offers and now allows additional exceptions for terminally ill individuals to make some penalty-free withdrawals. Personal or family emergencies are also added to allow withdrawals of up to $1,000 penalty-free beginning in 2024. The new law also creates exceptions for victims of domestic abuse, payment of long term care premiums and individuals affected by federally declared disasters retroactive to Jan. 26, 2021.

Small Businesses Eligible for Enhanced Tax Credits

As of Jan. 1, 2023, small businesses of up to 50 employees are being encouraged to offer retirement plans by making the companies eligible for enhanced tax credits. Businesses with 50-100 employees are also eligible for a lesser credit. Employers who match employee contributions are eligible for additional credits for five years.

Additions for Self-Employed Individuals

The new law allows self-employed individuals until April 15th (Tax Day) to open and fund an individual 401(k). For example, they have until the 2022 tax season to set it up for 2022. Under prior law, these entrepreneurs needed to set it up by Dec. 31.

Incentivizing 401(k) Plans

The new law also allows employers to automatically enroll employees making under $150,000 for 2023 in emergency savings accounts linked to a 401(k) plan. Employees can save up to $2,500 and withdraw tax and penalty free for emergencies. Additionally, employers can incentivize employees by giving small cash or gift card rewards to encourage employees to sign up for and contribute to a 401(k) type plan. Employers are also permitted to offer Roth matching contributions into an employees 401(k). Under the new law, the employee can choose to take the Roth match and pay taxes up front so the contributions can grow and be taken out later tax free.

Qualified Longevity Annuity Contracts

Additionally, the new law allows more people to obtain qualified longevity annuity contracts (QLACs). This contract is a deferred annuity that you can buy with guaranteed payouts for life starting at 80 or 85. Under the new law, individuals can take up to $200,000 from their IRA or 401(k) accounts to buy the annuity that would make guaranteed life payments. The QLAC amount is limited to either $145,000 or 25% of the retirement account balance, if less.

Charitable Gift Annuities or Remainder Trusts

Finally, the new law allows IRA owners who are 70 and 1/2 or older to take a one-time withdrawal of up to $50,000 to fund a charitable gift annuity or charitable remainder trust. This withdrawal won’t be taxed as income and can count toward the RMD for the year taken. Then the IRA owner will get an annual minimum payment of 5%, taxed as ordinary income. The chosen charity will receive the remaining funds when the owner passes away. This is a win-win—for the owner and for the charity. Financial Advisors, Estate Planners, CPAs and charitable fundraisers will all be encouraging individuals to fund these specific annuities or trusts.

If you have further questions or concerns about your retirement savings or overall estate planning, please contact KJK Estate, Wealth and Succession Planning Partner Susan Friedman (SLF@kjk.com; 216.736.7272).