2023 Retirement Account Changes: SECURE 2.0

On Thursday, President Biden signed into law the SECURE 2.0 Act of 2022. Overall, this plan contains many advantages for retirement savings, including more ways to fund Roth (after-tax) accounts, reduced penalties and additional ways to fund retirement accounts. Overall, this plan is great for anyone looking to fully utilize their retirement accounts and provides additional avenues for contributions.

Here are some things that changed and how/when it could impact you:

Employers, Employees and Student Loans

Any new 401(k) or 403(b) plans established after December 31, 2024 must automatically enroll employees. If employees do not opt-out, they will automatically contribute 3% to the plan. The automatic contribution amount will increase 1% per year, up to 15%.

In addition, if you have student loan debt and make payments throughout the year, you will have the option to receive a credit, up to the amount of the loan repayment, to your employer-sponsored retirement plan (beginning in 2025).

More Roth Options

As of 2022, there were limited ways to contribute after-tax dollars to a Roth IRA or 401(k). Roth IRA contributions are limited to $6,000 per year and only the employee portion of a 401(k) contribution ($19,500 for 2022) was eligible.

However, the new act provides multiple new avenues for contributions. Both SIMPLE and SEP plans will now be eligible for Roth contributions. You will also have the option to characterize any amount of your employer’s matching contribution as Roth. This will allow for much larger contribution amounts between plans. 

There is also a provision that allows for up to a $35,000 lifetime rollover from 529 plans to Roth IRAs. Currently, any funds that are not used for education purposes are subject to a 10% penalty upon withdrawal. Under the new plan, if you have had a plan for more than 15 years, you will be able to roll up to $35,000 to a Roth IRA.

Penalty Relief

There is currently a 10% penalty on most retirement account withdrawals before age 59.5. The new law permits an exception for withdrawals that pertain to emergencies. Taxpayers can withdraw up to $1,000 per year, penalty free, as long as it is the result of an emergency. This withdrawal must be repaid within 3 years.

The plan also allows up to a $22,000 distribution for taxpayers affected by natural disasters. This amount is penalty-free and the income tax can be reported evenly over a three-year period. This can be retroactively applied to anyone affected after January 26, 2021.

Retirement Credits

The Saver’s Credit will be eliminated in 2027 and replaced with a federal matching contribution to retirement accounts. This will reduce immediate tax benefits, but help taxpayers bulk-up their tax-advantaged retirement account.

Required Minimum Distributions (RMDs)

The plan raises the age for RMDs to 73 (beginning in 2023) and further raises it to 75 (beginning in 2033). The penalty for failing to take an appropriate RMD will be reduced from 50%, to 25%, with a provision for a 10% penalty if the error is corrected quickly.

SECURE 2.0 also removes the RMD requirement for Roth 401(k) accounts after December 31, 2023.