(T.RowePrice) - The SECURE 2.0 Act of 2022—also known as SECURE 2.0—was signed into law in late December 2022 to build on the retirement reforms introduced by the original Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
SECURE 2.0 includes wide-ranging changes to the retirement savings landscape, which will take effect over the next decade and will impact individuals both saving for and living in retirement.
Some of the themes directly affecting individual investors that we will discuss include changes to required minimum distributions (RMDs), efforts to boost retirement savings in workplace plans and individual retirement accounts (IRAs), and increased ease of access to retirement savings.
Provisions of the SECURE 2.0 Act of 2022 increased the starting age at which investors must start taking required minimum distributions (RMDs).
The new law offers incentives to boost retirement savings, including increasing catch-up contribution amounts.
Other provisions put a greater emphasis on Roth contributions to retirement accounts.
The Act also provides easier access to retirement savings.
CHANGES TO RMDs
In the original SECURE Act, the RMD age was raised from age 70½ to 72. In SECURE 2.0, the RMD age was increased again to age 73, with another increase that will take effect in 2033. A later RMD age enables investors with IRAs (including SEP and SIMPLE IRAs) or retirement plan accounts (such as 401(k)s and 403(b)s) to delay taking distributions if they don’t need access to the money. This means they will be able to further postpone tax payments on withdrawals and benefit from any tax-deferred growth potential of the assets.
Increased starting age for RMDs and decreased penalties
The starting age for RMDs was extended from age 72 to 73 for individuals who turn 72 on or after January 1, 2023. In 2033, this age will change again to 75.
If you turned age 72 in 2022 (or if you turned 70½ prior to 2020), you are required to continue taking your RMDs as there are no changes impacting individuals who reached RMD age prior to 2023.
RMDs are not required from Roth IRAs during the account owner’s lifetime. And starting in 2024, Roth accounts in retirement plans, such as 401(k) and 403(b) plans, will not be subject to RMDs during the participant’s lifetime.
Penalties for missed or late RMDs have been reduced from 50% to 25% of the RMD amount not taken starting in 2023. If a missed or late RMD is corrected in a timely manner, the excise tax on the failure will be further reduced—from 25% to 10%. This may be a helpful change for some investors.
Satisfying RMDs through QCDs
Many people use a qualified charitable distribution (QCD) to satisfy their RMDs. Starting in 2023, there are now additional qualified charities eligible for QCDs, including some charitable trusts and annuities. Those aged 70½ and older will be able to make a one-time gift of up to $50,000 (adjusted annually for inflation) to these newly established entities. In addition, the $100,000 annual limit for all QCDs will now be indexed to inflation.
Actions to consider if you are approaching or are in retirement:
Review the accounts used to satisfy your retirement income needs and consider whether an adjustment is necessary. If you did not reach age 72 by the end of 2022, the new RMD age gives you more flexibility. Remember, though, that minimizing your taxes early in retirement may not be the best strategy if it requires you to take larger RMDs at a higher tax rate at a later time.
Examine the benefits of a Roth conversion strategy given the SECURE 2.0 delay in RMD age. Roth conversions may increase your tax bill in the year of conversion but could potentially allow you to take tax-free withdrawals later. They are not for everyone, but may be beneficial for investors who can convert more of their tax-deferred assets to Roth assets (in total, over time) without being pushed into a higher tax bracket.
EFFORTS TO BOOST RETIREMENT SAVINGS IN WORKPLACE PLANS AND IRAs
SECURE 2.0 includes provisions to help individuals save for retirement.
Student loan payments
To help enable and encourage young people with student debt to start saving for retirement, employers with 401(k) plans, 403(b) plans, governmental 457(b) plans, and SIMPLE IRAs may now elect to update their plans to allow matching contributions on qualified student loan payments to the employee’s retirement account.
Another provision will allow employers to elect to update their plan to offer a Roth “emergency fund” to their non-highly compensated employees starting in 2024. This will allow eligible participants to make limited contributions to Roth emergency savings accounts and have access to those funds penalty-free. Contributions would be eligible for any employer match into their retirement account as an extra incentive to save.
Catch-up contributions increase
Starting on January 1, 2025, individuals aged 60 to 63 will be able to make larger catch-up contributions to employer-based retirement plans. The limit for people in that age range will be the greater of $10,000 or 50% more than the regular catch-up amount, indexed to inflation.
Also, the current IRA catch-up contribution amount of $1,000 will be indexed for inflation starting in 2024.
Actions you may want to consider:
If you are far from retirement, it’s generally beneficial to start saving for retirement as soon as you can to allow your investments more time for potential growth. If you are still paying off college debt and finding it difficult to put money away for retirement, we suggest that you take advantage of the provision for student loan payments, if it is available. Similarly, people hesitant to save for retirement until they build an emergency fund may soon be able to do both if they participate in a plan that takes advantage of the emergency savings provision.
If you are nearing retirement, the years leading up to retirement may be a good time to accelerate savings. When people are in peak earning years, they may no longer have large expenses like paying for their children’s college or outstanding mortgages. With lower expenses, investors can take advantage of the catch-up provision to boost their retirement savings.
A GREATER EMPHASIS ON ROTH
You may have noticed the mention of “Roth” accounts and “Roth” contributions in some of the provisions covered. Roth contributions, which are made after tax, can be beneficial to many people, especially those who are in a lower tax bracket now than they expect to be in retirement. This is because with Roth investments you will pay taxes on them now (potentially while you are in a lower tax bracket), and then you can take qualified distributions1 tax-free down the road.
So, why the greater emphasis on Roth? Since the government looks at the budget over a 10-year window, they consider Roth contributions favorable, as the tax revenue generated from them is immediate.
Company matching contributions
Employers may now permit employees to elect Roth employer matching and non-elective contributions. Note that employees must be 100% vested to take advantage of this change and that the employer’s Roth contribution will be included in the employee’s gross income for the year.
SEP and SIMPLE IRAs
For taxable years starting in 2023, SIMPLE IRAs can accept Roth contributions. Employers can also offer employees the ability to treat employer SEP contributions as Roth contributions. While effective now, additional guidance is needed from the IRS on this provision. In addition, service providers, like T. Rowe Price, will need time to update systems, custodial agreements, and processes prior to implementation.
Catch-up contributions for high-income earners
For high-income earners (over $145,000 from one employer), all catch-up contributions in employer plans after 2023 will need to be made to Roth accounts. This provision means that many plans that did not previously offer Roth contributions will likely add that option.
Roth accounts in employer plans
As noted previously, Roth accounts in employer plans will no longer have RMDs during the life of the participant after 2023. This will make the rule the same for Roth IRAs and in-plan Roth accounts.
529 plan conversions
Next year, changes in the distribution rules from long-term qualified tuition programs (529 plans) will enable investors to convert funds from a 529 plan that has been open for at least 15 years to a Roth IRA for the beneficiary. This will be subject to various rules including, but not limited to, the regular annual IRA contribution limit, plus a $35,000 lifetime maximum.
Actions you may want to consider:
Determine if Roth contributions are appropriate for your savings strategy. If so, find out what Roth contributions are available to you and whether your employer will allow employer contributions on a Roth basis.
If you’re a high-income earner (salary of over $145,000 from the same employer in the prior year), after 2023, all of your catch-up contributions will be made on a Roth basis. Given this change, you should determine if you need to make any adjustments to your various retirement accounts and manage your mix of account types.
If you have an unused remaining balance in a 529 account that has been open for 15 years or more, consider if the assets will serve the beneficiary better in the college savings account or a Roth IRA.
INCREASED EASE OF ACCESS TO RETIREMENT SAVINGS
The new rules in SECURE 2.0 will help investors gain additional access to their hard-earned savings in limited circumstances. However, it is important to note that it can be costly in the long term to make early withdrawals from retirement accounts.
There may now be additional ways to gain penalty-free access to your savings, including for situations involving domestic abuse, terminal illness, qualified disasters, and long-term care.
There is now an exception for certain distributions from retirement accounts used for emergency expenses. If a plan permits, investors may take one distribution per year (up to $1,000), and they have the option to repay the distribution within 3 years.
Actions you may want to consider if you’re still saving for retirement:
Although you may have easier access to the funds in your retirement accounts due to these changes, leaving them invested may allow funds to benefit from compound growth in the long term.
Overall, SECURE 2.0 includes meaningful changes that should have a positive impact on retirement savings for many Americans. While some individuals will not be largely affected, we believe people should take some time to consider how these changes to the laws may affect their personal circumstances. Investors may want to consult with their plan administrator, if applicable, and their tax or legal professional to evaluate whether they can take advantage of the new flexibility provided by the new law, such as the delayed age for beginning RMDs.
1Generally, withdrawals are tax-free once you reach age 59½ and have held the Roth account for at least five years.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of February 2023 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
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Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual outcomes may differ materially from any expectations or forward-looking statements made.
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March 1, 2023