The omnibus spending bill that was signed into law at the end of 2022—called the Consolidated Appropriations Act, 2023—includes several provisions affecting retirement savings. Specifically, the legislation includes what is referred to as the SECURE 2.0 Act of 2022.

Like its predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019, the SECURE 2.0 Act includes changes affecting how Americans save for retirement. It also impacts the decisions made regarding withdrawals. In this article, we discuss several of the changes most likely to impact AAII members. This midyear analysis takes advantage of post-passage observations made about the legislation and gives you time to make changes for the current and future tax years.

This article is split into two primary sections. The first section focuses on the accumulation (saving) phase, while the second section focuses on the withdrawal (retirement) phase.

Changes That Apply When Saving for Retirement

Changes that affect the accumulation phase of retirement savings include revisions to catch-up contributions, making student debt payments eligible for matching contributions, the creation of emergency savings accounts, a new Saver’s Match and the forthcoming ability to roll 529 plan savings into a Roth individual retirement account (IRA).

IRA Catch-Up Contributions Will Be Indexed to Inflation

Individuals age 50 and older have long been able to make an additional catch-up contribution of $1,000 to their traditional IRAs and Roth IRAs. The $1,000 limit was a fixed amount.

Starting in 2024, the catch-up contribution will be indexed to inflation. Future increases to account for inflation will be made in increments of $100. This change means both the IRA/Roth IRA contribution and the catch-up contribution could be raised on a given year depending on inflation and their respective breakpoints.

$10,000 Catch-Up Contribution to Employer-Sponsored Retirement Plans

Workers who are participating in an employer-sponsored retirement plan like a 401(k) or 403(b) and are age 60, 61, 62 or 63 will be eligible to make a catch-up contribution of at least $10,000. This increased catch-up contribution will go into effect in 2025.

We use the words “at least” because the actual amount will be 150% of the catch-up contribution limit for those age 50 or older starting in 2024. Should the regular catch-up contribution limit stay at its current amount of $7,500 in 2025, it would make the age 60–63 catch-up contribution $11,250 ($7,500 × 150%). The new catch-up contribution will be indexed to inflation after 2025.

Workers participating in a Savings Incentive Match Plan for Employees (SIMPLE) who are age 60–63 will be eligible to make a higher catch-up contribution of $5,000 (versus $3,500 in 2023) or 150% of what the regular catch-up contribution will be in 2025. This increased catch-up contribution will also be indexed to inflation.

Catch-Up Contribution by a High Earner Must Go to Roth

Catch-up contributions made by higher-earning participants in a 401(k) plan or similar employer-sponsored workplace plan must be on a Roth basis starting in 2024. This means catch-up contributions will only be allowed on an aftertax basis. The earnings threshold for this rule is $145,000.

There have already been questions raised about the wording used in Section 603, Elective deferrals generally limited to regular contribution limit, to mandate this change.

Let’s start with the definition of how the earnings threshold is determined. The law specifically states that the change applies to “an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000.”

Ian Berger with the Slott Report (an IRA-focused newsletter) pointed out that the use of the word “wages” in the law may exempt those who receive earned income instead of wages, such as business owners. Additionally, “a high-paid employee who changes jobs will get a free pass from the mandatory Roth catch-up in the year he starts the new job … because he won’t have any wages from his current employer in the prior year.”

An error identified by the American Retirement Association is even more significant. “Specifically, according to wording in the current legislation, beginning in 2024, no participants will be able to make catch-up contributions (pre-tax or Roth),” wrote John Sullivan on the National Association of Plan Advisors’ website. “Because the ability to make catch-up contributions on a pre-tax basis was eliminated [in Section 603], this means no catch-up contributions may be on a Roth basis either.” Congress intends to address this and other technical errors in the law, according to retirement industry publication PLANSPONSOR, though no timetable for doing so was given.

Matching Contributions Based on Student Loan Payments

Qualified student loan payments can count toward eligibility for employer matching contributions starting in 2024. The loan repayments will be treated similarly to an elective contribution to a 401(k) plan or other similar employer-sponsored defined-contribution plan.

Per consulting firm RSM, “The amount of the match is calculated as if the employee had elected to contribute the loan repayment amount to the plan by payroll deduction, even though the employee’s pay is not actually reduced by that amount and the employee does not in fact make any elective contributions to the plan.” The size of the match must be determined in the same manner as if the employee makes a direct contribution to their 401(k).

The same limits that apply to contributions will apply to student loan payments for the purpose of determining the matching contribution [$22,500 for 401(k)/403(b)/457(b) plans and $15,500 for SIMPLE plans in 2023]. Those limits are based on the cumulative amount of elective contributions made by the employee and their eligible student loan repayments.

Employers Can Offer Emergency Savings Accounts

Employers will be able to offer emergency savings accounts alongside retirement savings accounts starting next year. These accounts would be designated as Roth accounts, meaning they would be funded with aftertax dollars. Up to four withdrawals per year could be taken on a tax- and penalty-free basis.

Employee contributions would be capped at $2,500 or the plan sponsor’s limit. This amount will be subject to inflation adjustments in $100 increments starting in 2025.

Saver’s Match Replaces Saver’s Credit

Currently, those with qualifying levels of income are eligible for a tax credit on contributions made to a retirement plan, IRA or Achieving a Better Life Experience (ABLE) account.

Starting in 2027, this Saver’s Credit will be replaced by a new Saver’s Match. The Saver’s Match is a matching contribution made by the federal government of up to 50% of the first $2,000 contributed to a qualifying retirement account.

529 Plans Can Be Rolled Over Into a Roth IRA

Starting in 2024, up to $35,000 from 529 college savings plans can be rolled over to a beneficiary’s Roth IRA on a tax-free basis. To qualify, the 529 plan must have been funded for at least 15 years ending on the date of distribution, the amount does not “exceed the aggregate amount contributed to the program (and earnings attributable thereto) before the five-year ending on the date of the distribution” and the rollover is made via a “direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of such designated beneficiary.”

In addition, Roth IRA contribution limits apply. This means the total of IRA/Roth IRA contributions and any 529-to-Roth rollovers cannot exceed the contribution limit for the calendar year. Jeffrey Levine notes on Kitces.com that while there are income limits on Roth IRA contributions, there aren’t such limits on 529-to-Roth rollovers.

Changes to Retirement Withdrawal Rules

One of the biggest changes the SECURE 2.0 Act makes regarding withdrawals from retirement savings is raising the minimum age for when distributions must be taken. The new law also ends required minimum distributions (RMDs) for employer-sponsored Roth accounts, indexes qualified charitable donations (QCDs) to inflation, creates a new surviving spouse designation and allows for penalty-free emergency withdrawals from 401(k) and similar plans.

Starting Age for RMDs Pushed Back Further

The original SECURE Act raised the required beginning date (RBD) for when RMDs must start from traditional IRA, Simplified Employee Pension (SEP) plan IRA, SIMPLE IRA and retirement plan accounts [e.g., 401(k) plans] to age 72. It was formerly age 70½. The SECURE 2.0 Act raises the starting age to 73 effective in 2023. The RBD will rise further in 2033, to age 75.

Those following under the older rules using age 70½ or 72—meaning you were at least 72 in 2022—will continue to take their RMDs as is. Those who turn 72 in 2023 will not need to start taking their RMDs until either 2024 or by April 1, 2025, at the latest. (Those who opt to delay until April 1, 2025, will still have to take their second RMD by December 31, 2025.)

Another error in the law’s text appears in Section 107, Increase in age for required beginning date for mandatory distributions: ‘‘(I) In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73. (II) In the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75.”

Levine pointed out that “individuals born in 1959, who turn 73 in 2032 (i.e., before 2033)” would fall into part one of Section 107. The second part “says that the new applicable age of 75 will apply to those who turn ‘74 after December 31, 2032.’ The problem here is that an individual born in 1959 turns 74 in 2033 (i.e., after December 31, 2032). Thus, individuals born in 1959 would appear to have 2 ages—74 and 75—at which they are supposed to begin RMDs!”

Clearly, this was not Congress’ intention. Levine says he has “spoken with multiple parties who have confirmed that both the discrepancy is a drafting error and the intention is for the age 75 applicable age to apply to those turning 75 in 2033 or later.”

RMDs From Roth 401(k) and 403(b) Plans to End

While Roth IRAs have long been exempted from RMD rules, Roth 401(k) and Roth 403(b) plan accounts were not. Mandatory distributions have been required from these employer-sponsored accounts. Starting in 2024, RMDs will no longer be required to be taken from them.

There is a quirk here to pay attention to. Per the Internal Revenue Service (IRS), “Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. You must still take RMDs from designated Roth accounts for 2023, including those with a required beginning date of April 1, 2024.”

Because RMDs are being eliminated, the starting age for taking RMDs from these Roth accounts is not changing. So, if you turn 73 this year (2023) you must take your first and only RMD from your Roth 401(k) and Roth 403(b) account by April 1, 2024. Afterward, no RMDs will be required from these accounts.

Since RMDs will no longer be required from these designated Roth accounts, rolling over such accounts to a Roth IRA to avoid RMDs will no longer be necessary. This changes the decision about whether to roll over or not to simply being focused on the pros and cons of each type of account (assuming your employer-sponsored plan does not mandate that you close your account). See “The Rules Regarding Retirement Account Rollovers” in the May 2023 AAII Journal for more information.

QCDs Now Indexed to Inflation

Qualified charitable distributions will be indexed to inflation starting in 2024. The current limit is $100,000 per year. Up until the passage of the new law, the $100,000 has been a fixed amount.

In addition, the law provides a one-time opportunity to use a QCD to fund a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT) or a charitable gift annuity (CGA) starting in 2023. The maximum amount is $50,000 (indexed to inflation). Management services company ADP points out, “If a distribution is directed to a CRUT or CRAT, it must be the only form of funding for that trust.”

QCDs are a highly tax-efficient way for retirees to make charitable donations since they offset RMDs from an IRA dollar for dollar. This directly reduces reportable income, as opposed to being a deduction. See “The Tax Advantages of Qualified Charitable Distributions From IRAs” in the October 2016 AAII Journal for more information.

New Surviving Spouse Designation

The spouse of an employee who dies will be able to elect to be treated as a “surviving spouse” beginning in 2024. By doing so, the surviving spouse will be treated as if they are the employee and will not need to take distributions from the deceased spouse’s plan account until the employee would have reached their RBD for taking withdrawals. Furthermore, if the surviving spouse dies before plan distributions start, they would be treated as if they were the employee.

To qualify for surviving spouse status, the deceased employee must have named their spouse as the designated beneficiary of the plan account and the spouse of the deceased must opt for surviving spouse status.

This change gives surviving spouses another option in terms of how to handle retirement accounts from their deceased spouse. (Widows and widowers will still have the option to instead roll over their deceased spouse’s retirement accounts to their own IRA as well as their other existing options.) Opting for surviving spouse status allows them to use the Uniform Lifetime Table instead of the Single Life Expectancy Table for determining RMDs.

Allowing Emergency Withdrawals

An emergency withdrawal totaling no more than $1,000 will be allowed from 401(k) and other employer-sponsored retirement plan accounts without incurring the 10% penalty for early withdrawals. (The withdrawals would be a taxable event, however.) Withdrawals are eligible under the emergency withdrawal status if they will be used for “meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”

Only one withdrawal per year will be allowed. If an emergency withdrawal is taken, no additional emergency withdrawals may be taken over the next three years without the withdrawal being repaid or if the amount contributed to the plan subsequent to the distribution is at least equal to the unpaid distribution. The rule goes into effect in 2024.

Further Guidance to Come

The SECURE 2.0 Act made many changes to retirement savings. Guidance regarding several of the changes has yet to be published by the IRS. Additionally, legislative fixes for certain parts of the law will be required.

Those with questions about how the changes will apply to their personal situation are encouraged to meet with a tax professional and potentially an attorney who specializes in estate planning. 

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