After months of negotiations, Congress finally passed the long-awaited Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). This part of the omnibus funding package builds on the SECURE Act of 2019 and contains major changes in the required minimum distribution (RMD) rules and other retirement provisions. Here are five major taxpayer-friendly changes that will kick in over the next few years.
1. Increased Starting Age for RMDs
Traditional IRAs, individual retirement annuities, and accounts in employer-sponsored qualified retirement plans — such as 401(k) plans, profit-sharing plans, 403(b) plans, and 457(b) plans — are generally subject to the required minimum distribution (RMD) rules.
Old rules. Before SECURE 2.0, you had to start taking RMDs for the calendar year during which you turn age 72. However, you could postpone the deadline for taking your initial RMD until April 1 of the year following the year you turn age 72. The April 1 deadline is the required beginning date (RBD).
Under an exception, the RBD for taking RMDs from an account with an employer-sponsored qualified retirement plan is April 1 of the year after the year you retire, as long as you’re not a 5% owner of the employer.
New rules. SECURE 2.0 increases the starting age for RMDs to:
- Age 73, starting in 2023, for individuals who attain age 72 in 2023 through 2032,
- Age 75, starting in 2033, for individuals who attain age 74 after 2032.
Important: The favorable RMD starting age change doesn’t affect people who turned 72 before 2023. For instance, if you turned 72 in 2022, you must take your initial RMD by no later than April 1, 2023, or face a possible IRS penalty. If you turned 72 before 2022, you must take your RMD for the 2023 calendar year by December 31, 2023, or face a possible penalty. The exception for individuals who are still working remains in place.
2. Reduced Penalty for Failure to Take RMDs
Failure to comply with the RMD rules can potentially result in significant IRS penalties.
Old rules. Before SECURE 2.0, if you failed to take your RMD for the year in question, the IRS could impose a 50% penalty on the shortfall. The shortfall equals the difference between the RMD amount for the year and the total withdrawals you took during that year if any.
New rules. SECURE 2.0 generally reduces the penalty for failure to take RMDs from 50% to 25%. In addition, if the failure to take an RMD is corrected within the correction window, the penalty is reduced from 25% to only 10%. During the correction window, you must also submit Form 1040 which reflects the penalty.
The correction window is defined as the period beginning on the date on which the penalty arises on the RMD shortfall and ending on the earliest of:
- The date the IRS mails a notice of deficiency for the penalty,
- The date the IRS assesses the penalty, or
- The last day of the second tax year after the tax year in which the penalty arises.
This change is effective for tax years beginning after December 29, 2022. That means it kicks in for 2023 for the majority of individuals who use the calendar year for tax purposes.
3. Larger Catch-Up Contributions, Starting in 2025
Employer-sponsored 401(k), 403(b), and 457(b) plans can allow participants who are 50 or older to make additional salary reduction contributions (known as elective deferral contributions) to their accounts. These extra contributions for older participants are called catch-up contributions, and they’re over and above the standard salary reduction contribution maximum ($22,500 for 2023, with periodic inflation adjustments for later years).
Salary reduction catch-up contributions are also allowed for SIMPLE plans, above and beyond the standard contribution limit ($15,500 for 2023, with periodic inflation adjustments for later years).
Current rules. For 2023, the maximum catch-up contribution to one of these employer-sponsored plans is $7,500 (with inflation adjustments for later years). For 2023, the maximum catch-up contribution for SIMPLE plans is $3,500 (with periodic inflation adjustments for later years). These inflation-adjusted amounts will remain in effect for the 2023 and 2024 tax years.
New rules. Starting in 2025, apparently, for participants who attain age 60 through 63 only, SECURE 2.0 increases the maximum catch-up contribution to the greater of:
- $10,000 or $5,000 for SIMPLE plans, or
- 150% of the standard 2024 catch-up limit or 150% of the 2025 standard catch-up limit for SIMPLE plans.
Important: As of this writing, it isn’t entirely clear how to calculate the increased catch-up limits and exactly who can benefit from them. The IRS is expected to issue guidance to clarify the rules.
In addition, starting in 2025, participants whose prior-year wage income exceeds $145,000 (as adjusted for future inflation) will apparently be able to make catch-up contributions only to a company-sponsored designated Roth account, if their company offers this option. Such contributions won’t reduce your taxable salary. If your company doesn’t offer the designated Roth account option and your prior-year income exceeds $145,000 (as adjusted for inflation), you apparently won’t be able to make any catch-up contribution. The IRS is also expected to issue guidance to clarify this provision of the new law.
4. Penalty-Free Withdrawals for Designated Emergency Expenses
A 10% penalty potentially applies to early withdrawals made before age 59½ from tax-deferred retirement accounts, such as traditional IRAs and company-sponsored qualified retirement plan accounts.
Old rules. There are a number of exceptions to the 10% penalty, including withdrawals taken from a company plan after separating from service at age 55 or older. Examples of other exceptions include:
- Annuity-like withdrawals (so-called substantially equal periodic payments),
- Withdrawals took while disabled,
- Withdrawals took from an IRA to pay qualified higher education expenses, and
- Withdrawals took to pay medical expenses in excess of 7.5% of adjusted gross income.
New rules. SECURE 2.0 retains the exceptions allowed under the old rules while adding a new exception to the 10% penalty for early withdrawals to cover unforeseeable emergency expenses. Only one penalty-free withdrawal of up to $1,000 is allowed in any tax year. You have the option to recontribute the withdrawn amount within three years to get the money back into tax-deferred status. But no additional emergency-related withdrawals can be taken during the three-year repayment period unless repayment is made.
5. Retirement Plan Emergency Savings Account
SECURE 2.0 contains another emergency-related retirement savings provision: emergency savings accounts. This all-new savings opportunity allows employers to offer non-highly compensated employees emergency savings accounts linked to their individual retirement plan accounts.
Specifically, employers can automatically opt employees into these accounts with contributions limited to 3% of salary. The amount of an employee’s account that’s dedicated to this purpose is capped at $2,500 or a lower amount set by the employer. Contributions are after-tax (meaning they don’t reduce your taxable salary). You can take withdrawals at least once per month.
At separation from service, you can take your emergency savings account balance in cash or roll the balance over into an employer-sponsored designated Roth account or IRA. This change is effective for plan years after 2023.
For More Information
These five changes represent only the tip of the SECURE 2.0 iceberg. The new law contains many additional changes that will affect individuals and employers. If you have questions or want more information about how the law might affect you or your business, contact your tax or financial advisors.