The SECURE Act 2.0 Becomes Law, Bringing Workplace Retirement Plan and IRA Changes.
Edward A. Zurndorfer
During late December 2022, Congress passed the $1.7 trillion Consolidated Appropriations Act of 2022 which was signed into law by President Biden on December 30, 2022. Tucked inside the Consolidated Appropriations Act of 2022 is more than 4,000 pages of legislation that comprises SECURE Act 2.0.
While SECURE Act 2.0 does not affect traditional IRAs and Roth IRAs as much as the original SECURE Act (known as SECURE Act 1.0) passed into law in late 2019 (and took effect January 1, 2020), there are still several changes coming out of SECURE Act 2.0 that will affect IRA owners and beneficiaries. But most of the SECURE Act 2.0 provisions impact workplace retirement plans (401(k) and 401(b) plans), and the Thrift Savings Plan (TSP).
This column presents a list of the major changes and provisions to IRAs and workplace retirement plans resulting from the SECURE Act 2.0 passage. It is important to note that not all provisions resulting from the SECURE 2.0 Act passage will be effective in 2023. Some provisions will not become effective until 2024 and some changes will not become effective until 2033.
The following are a list of the major changes and provisions coming from SECURE Act 2.0 that affect qualified retirement plans, the TSP, and traditional IRAs:
• Increase Required Minimum Distribution (RMD) Age. SECURE Act 1.0, passed in December 2019 and taking effect on January 1, 2020, increased the age at which participants in employer-sponsored defined contribution plans (including the TSP) and traditional (non-Roth) individual retirement accounts (IRAs) must begin taking required minimum distributions (RMDs). In particular, SECURE Act 1.0 increased the required beginning date (RBD) (the date a retired retirement plan participant has to take his or her first RMD) from April 1 following the year a retired qualified retirement plan participant (or a traditional IRA owner) becomes age 70.5 to April 1 following the year the qualified retirement plan participant or traditional IRA owner becomes age 72, applicable to individuals born after June 30, 1949. Effective January 1, 2023, SECURE Act 2.0 increases the RBD to April 1 following the year a retired qualified retirement plan participant or traditional IRA owner becomes age 73, applicable to individuals born after December 31, 1950. The RBD will increase to age 75 starting in the year 2033, applicable to individuals born after December 31,1959. Note that any individual currently subject to RMDs under the age 70.5 or age 72 RMD rules is not impacted and must continue to follow their existing RMD schedule.
• QCDs Expanded. Starting in 2023, a one-time only $50,000 qualified charitable distribution (QCD) to a charitable gift annuity, to a charitable remainder unitrust, or to a charitable remainder annuity trust is allowed. Also, the current QCD limit of $100,000 will be indexed for inflation, starting in 2024.
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• IRA Catch-up Contribution Indexed. Individuals who are age 50 or over can currently make an additional IRA catch-up contribution of $1,000. The current $1,000 amount will be indexed to inflation starting in 2024. Future annual catch-up contribution increases will be in increments of $100.
• Saver’s Match Program. Starting 1/1/2027, the Saver’s Match Program will replace the current IRS (nonrefundable) Saver’s Tax credit. The IRS’ “Saver’s Credit” for short — is a tax credit worth up to $1,000 ($2,000 if married filing jointly) for mid- and low-income individuals who contribute to a qualified retirement account or to an IRA. The Saver’s Match Program will result in federal government matching contributions to mid- and low-income individuals who contribute to a qualified retirement plan or to an IRA. The federal government matching contributions will be deposited into the individual’s IRA or qualified retirement plan. The Saver’s Match Program will be an incentive for individual retirement savings by providing a federal government matching contribution of up to $2,000 in retirement savings annually for low- and middle-income Americans, without regard to whether an individual has a tax liability. The federal government matching contribution phases out based on an individual’s adjusted gross income (AGI); in particular, between $41,000 and $71,000 of AGI in the case of individuals who file as married filing joint, $20,500 to $35,500 of AGI for single individual tax filers and individuals filing as married filing separate, and $30,750 to $53,250 of AGI for head of household tax filers.
• Rollovers from 529 Plans to Roth IRAs. SECURE Act 2.0 adds a new way to do a tax- and penalty-free rollover from a 529 college savings plan account to a Roth IRA under certain conditions. Currently, money in a 529 college savings plan account that is distributed for non-education expenses can be subject to penalties and taxes. But under SECURE Act 2.0, beneficiaries would be able to do a rollover of $35,000 aggregate in life from a 529 college savings plan to a Roth IRA in their name. The rollovers each year would be subject to the Roth IRA annual contribution limits for that year. The 529 college savings plan must also have been opened for at least 15 years. Earnings and contributions will be treated like any other Roth IRA account or Roth rollover. However, the annual income limitation to contribute to a Roth IRA will be removed when a 529 college savings plan is rolled over to Roth IRA. The amount of the rollover in any year will be limited to that year’s Roth IRA contribution limit. The 529 college savings plan to Roth IRA rollovers will become effective January 1, 2024.
• New Exceptions to the 10 percent Early Distribution Penalty. A slew of new 10 percent early distribution penalty exceptions has been added with different effective dates. These exceptions include qualified retirement plans and the TSP distributions for retirement plan participants with terminal illness, effective immediately; federal declared disaster areas – for retirement plan participants living in federal declared disaster areas and who must withdraw from their retirement accounts – $22,000 limit, effective retroactively to 1/26/2021; domestic abuse – $10,000 limit, effective 1/1/2024; financial emergencies – $1,000 limit, effective 1/1/2024; and long-term care (LTC) – $2,500 limit, effective 1/1/2025.
• Expansion of “Age 50” Exception. SECURE Act 2.0 modifies the exception for the 10 percent early distribution penalty made to qualified public safety officers and federal “special provision employees”. “Special provision employees’ include federal law enforcement officials (LEOs), firefighters and air-traffic controllers. Currently, the exception applies to qualified public safety officers who retire at age 50 or older. Under SECURE Act 2.0, the exception to the 10 percent early withdrawal penalty will also apply to federal employees who have at least 25 years of service as a special provision employee and retires no matter their age. Thus, a distribution from the TSP that is made to a special provision employee who retires from federal service after attainment of age 50 (with at least 20 years of federal service) or 25 years of federal service (no matter their age), whichever is earlier, will not be subject to the 10 percent early withdrawal penalty. This provision becomes effective January 1, 2023.
• Repayment of Qualified Birth or Adoption Distributions Time Limitation. The SECURE Act 1.0 included a provision that allows individuals to receive penalty-free distributions from their qualified retirement account, including the TSP, and IRAs in the case of birth or adoption. There was no time limit on repaying these distributions. SECURE Act 2.0 imposes a three-year time limit.
• Penalty Reduced for Missed RMDs. The hefty 50 percent penalty for missed RMDs is reduced to 25 percent. If the missed RMDs are corrected within one year, the penalty is further reduced to 10 percent. A three-year statute of limitations for the RMD penalty is also added.
• No Lifetime RMDs for Roth Plans. Unlike Roth IRAs, Roth retirement plans in the workplace, including the Roth TSP, have been subject to RMDs during the Roth retirement account participant’s lifetime. Beginning January 1, 2024, this will no longer be the case. This means that starting January 1, 2024, a retired federal annuitant who is subject to TSP RMDs will not have included in the calculation of his or her TSP RMD the balance in his or her Roth TSP account.
• “Supercharged” Retirement Plan Catch-Up Contributions. Starting January 1, 2025, individuals who are ages 60,61,62 or 63 will be eligible to make larger catch-up contributions to their plans.
• Requirement that Age-Based “Catch-Up” Contributions Must Be Roth. SECURE Act 2.0 requires that depending on a qualified retirement plan or a TSP participant’s wages (in particular, one’s “Social Security” wages), age-based “catch-up” contributions to employer-sponsored retirement plans including the TSP must be made to Roth accounts. The purpose of this law is to allow the federal (and state) government to tax the contribution dollars sooner. Currently, TSP “catch-up” contributions can be made by over age 40 TSP participants to either the traditional TSP to the Roth TSP. This law becomes effective January 1, 2024. Under SECURE Act 2.0, the Roth TSP “catch-up” contribution mandate applies only to employees whose Social Security wages were over $145,000 (indexed) in the prior year. SECURE Act 2.0 also specifies that employees whose Social Security wages are below $145,000 (indexed) in the prior year will be permitted to make “catch-up” contributions to either the traditional TSP, to the Roth TSP, or to both the traditional TSP and the Roth TSP.
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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
