The SECURE Act 2.0 was passed as part of an omnibus spending bill in December 2022, setting up further changes to your retirement accounts in addition to the original SECURE Act passed in 2019. 

With help from Beth Kmiec, JD, Senior Vice President - Director Of Fiduciary Services, and Bill Conway, Assistant Vice President – Company Retirement Plans, we summarize key points we believe are most relevant to clients. 

“Although the SECURE Act 2.0 added many complications, new calculations, and additional layers of rules, the changes are positive,” Kmiec says. “If you can take advantage of them, you can benefit from them.” 

Extending Age For Required Minimum Distributions

Where it was once age 70½, the age of Required Minimum Distributions (RMD) changed to 72 in 2019 and age 73 in 2023. In 2033, the RMD age will jump again to 75. In addition, the highly punitive penalty for missed RMDs decreased from 50% to 25% and, if a mistake is corrected promptly, the penalty drops to 10%. 

“While all these different rules may cause some confusion, there is no downside to any of these changes, and you will now have more time to grow your deferred retirement accounts if you haven’t already reached the RMD age,” Conway says.

Giving More Money In Qualified Charitable Distributions

The RMD age change does not affect the Qualified Charitable Distribution (QCD) age rules. This benefit allows you to give up to $100,000 annually to charity directly from your IRA if you are older than 70½ without having to recognize the distribution as income, which lowers your Adjusted Gross Income (AGI). Minimizing AGI is beneficial for certain tax credits and deductions. However, SECURE Act 2.0 does change the $100,000 limit beginning in 2024, when the limit will be adjusted annually for inflation.

“The inflation adjustments boost the opportunity to take advantage of this strategy as a popular way to support charities,” Kmiec said.

Dropping Roth 401(k) And 403(b) RMDs

There was concern that the SECURE Act 2.0 would reduce or eliminate the benefits of Roth accounts, but it doesn’t touch them. The “backdoor Roth conversion” strategy is still intact; the IRS placed no new limits on who can use Roth conversions, and the SECURE Act 2.0 expanded some benefits. While Roth IRAs have never been subject to RMD for the original owner, Roth 401(k) and 403(b) plans did require an RMD, making it more desirable to roll Roth funds into a Roth IRA upon retirement. Congress aligned the rules amongst all plans, eliminating the RMD requirements for Roth 401(k) and 403(b) plans.

Matching Funds For Student Loan Payments 

Starting in 2024, the SECURE Act 2.0 allows employers to contribute matching funds to retirement plans for employees paying student loans. For instance, if an employee shows proof of a $350 monthly student loan payment, the employer can consider that loan payment the same as a $350 payroll deduction for contribution to a company-sponsored 401(k) and deposit matching funds toward the employee’s retirement. This new student loan matching provision is subject to annual deferral limits and overall contribution limits.

“This new provision is designed to help recent graduates with student loan debt,” Conway said. “As long as they are making student loan payments and provide documentation to their employer, they can receive an employer-matching 401(k) contribution as if they’d contributed to their retirement plan. That way, they can pay their student loans while also acquiring funds for retirement.”

Increasing 529 Plan Flexibility

The new SECURE Act 2.0 rules increase flexibility for 529 education savings plans that are quite popular. The new law now allows people to roll up to $35,000 of unused 529 plan funds over to a Roth IRA. You can’t transfer funds that were contributed to the 529 plan over the previous five years, and the law treats the rollover as a contribution towards the annual Roth IRA contribution limit, which means it takes several years to take full advantage of this new provision. The 529 plan must be in place for at least 15 years, and the Roth IRA receiving the funds must be in the name of the 529 plan beneficiary. 

“This could be a good way to help your children or grandchildren get a jump start on their retirement savings if their 529 education savings plan was over-funded or they received scholarships,” Kmiec said. “Parents can also use 529 plans for expenses incurred during kindergarten through high school in a limited capacity, per the original SECURE Act passed in 2019.”

Raising IRA Catch-Up Contributions

There are some changes to IRA catch-up contributions. When you turn 50, you can contribute an additional $1,000 to your IRA. For example, in 2023, if you are 50 or older, you can contribute up to $6,500 to an IRA, plus the catch-up amount of $1,000. Beginning in 2024, the catch-up amount will adjust for inflation in increments of $100. Additionally, catch-up contributions in 2025 to 401(k) and 403(b) plans for participants ages 60-63 increased to $10,000 or more.

“All these changes might be a bit confusing,” Conway said. “But your retirement plan administrator and your company’s retirement plan provider should be able to guide you to take advantage of them. At First Business Bank, we pride ourselves on plan participant education to help employees prepare for retirement. Our clients should reach out to our team if they have any questions.”

Clarifying The Inherited IRA 10-Year Rule

The 10-year rule was not part of the SECURE Act 2.0, however, there was clarification on this rule within the IRS proposed regulations of the SECURE Act that was contrary to prior interpretation, so it is worth noting.

In the 2019 law, Congress eliminated the benefit of the “Stretch IRA,” which was the ability to use a beneficiary’s life expectancy to minimize RMDs, and therefore “stretch” the IRA distributions over the beneficiary’s lifetime. That rule was replaced with the 10-year rule, which was interpreted to mean that the beneficiary must distribute the entire Inherited IRA within ten years of the death of the IRA owner, but with no RMD in the meantime. The IRS interpreted the 10-year RMD rule differently and determined that annual RMDs are required during the 10 years if the owner was already in RMD status. The IRS acknowledged that thousands of beneficiaries did not follow the rule according to the proposed regulation from 2021 to 2023. Therefore, there was no penalty in those years for not withdrawing. However, starting in 2025, there will be RMDs for beneficiaries of IRAs if the deceased owner was in RMD status.

“As the rules continue to get more complicated, it can be more difficult to keep up, even for the professionals,” Conway said. “There is much more in the SECURE Act 2.0 that might apply to you and your family, including exceptions for accessing retirement funds in emergencies and for certain professions.”

Despite its complexity, the SECURE Act 2.0 is a positive step forward for retirement savers. It makes it easier for people to save for retirement and provides more flexibility in how they use their retirement savings. 

Updated: 7/9/2024