In December 2022, Congress and the president did what they do best—spend more money–$1.7 trillion. The spending includes $858 billion for the military, $772 billion for domestic priorities, another $45 billion for Ukraine, and oh, by the way, enough money to keep the government running until September 2023, which was allegedly the reason for the whole process to begin with. And it only took 4,155 pages to get it done.
Buried in this latest government spending epistle are 90 rule changes for Traditional IRAs, Roth IRAs, and 401(k) accounts. These new regulations are updates and improvements to the SECURE Act passed in 2019. Consider it SECURE Act 2.0. Some rules begin immediately in 2023 while others take effect over time.
Required Minimum Distributions (RMD)
Before the SECURE Act of 2019, you were forced to take required distributions from IRAs and 401(k)s beginning at age 70 ½. The SECURE Act changed the age to 72 for anyone reaching that age after January 1, 2020. Under SECURE 2.0, the age for RMDs goes up to 73 beginning January 1, 2023, and then to age 75 beginning January 1, 2033.
The new rules are also a little more forgiving if you fail to take your RMD by the end of the year. Under the old rules, you were charged a 50% penalty if you didn’t get the required distribution out by 12/31. As of January 1, 2023, the penalty is reduced to 25%, and it goes down to 10% if the failure is corrected “in a timely manner,” although there’s no definition of that phrase.
Contribution Limits for 401(k)s and IRAs
Standard contribution limits to 401(k)s and IRAs, adjusted each year for inflation, will not change. The improvement comes for people eligible for catch-up contributions. Under the old rules, if you were age 50 or older, the catch-up contribution limit for IRAs was $1,000 and $6,500 to 401(k) accounts.
Beginning in 2024, instead of a flat $1,000, the contribution will be indexed for inflation just like the base amount. However, if the inflation-adjusted amount is not a multiple of $100, the new amount will be rounded down to the next lower multiple of $100. As a result, the $1,000 amount might not rise right away.
In 2025, SECURE 2.0 adds a special catch-up contribution limit to 401(k) plans for employees ages 60-63. Their catch-up contribution limit will be $10,000 or 150% of the “standard” catch-up contribution amount for 2024. The $10,000 amount will be adjusted for inflation each year starting in 2026.
Starting in 2024, the SECURE 2.0 Act also requires all catch-up contributions for workers with wages over $145,000 during the previous year to be deposited into a Roth (i.e., after-tax) account. The wage threshold will be adjusted annually for inflation beginning in 2025 (rounded down to the lowest multiple of $5,000).
In 2024, the new legislation authorizes “starter 401(k) plans” for employers with no retirement plan. It would require all workers to be enrolled in the plan by default with a 3% to 15% employee contribution rate. A $1,000 catch-up contribution is also allowed for workers who are at least 50 years old and participating in the starter 401(k) plan. The $1,000 amount will be adjusted annually for inflation.
Changes to Tax Credits
Beginning in 2027, the Saver’s Credit goes away. The non-refundable tax credit will be replaced with a federal matching contribution to a retirement account.
There are changes to the rules for account rollovers from 529 Education Savings plans. Through 2022, money withdrawn from a 529 for purposes other than higher education was hit with a 10% IRS penalty. Under the new law, beneficiaries of 529 college savings accounts will be allowed to roll over up to $35,000 total in their lifetime from a 529 plan into a Roth IRA. The Roth IRA will still be subject to annual contribution limits, and the 529 account must have been open for at least 15 years.
Early Withdrawal from Retirement Accounts
Under the old rules, if you withdraw money from a retirement account before age 59 ½, the IRS charged you a 10% early withdrawal penalty.
Under SECURE 2.0, anyone younger than 59 ½ can withdraw up to $1,000 per year for emergencies and have three years to repay the distribution without penalty. No further emergency withdrawals can be made within that three-year period unless repayment occurs.
And the new rule is on the honor system. Employees can say they have an emergency—no documentation is required. If a person is terminally ill, all penalties are waived.
Americans impacted by natural disasters will also get some relief with the changes. The new rules will allow up to $22,000 to be distributed from employer plans or IRAs in the case of a federally declared disaster. The withdrawals won’t be penalized and will be treated as gross income over three years. The rule will apply to all Americans affected by natural disasters after Jan. 26, 2021.
The new retirement rule changes also apply to 403(b) accounts. Before, hardship withdrawals from 403(b) accounts could only come from employee contributions, not earnings. Starting in 2025, the rules for hardship withdrawals will be the same for 403(b) and 401(k) plans.
Student Loan Debt and Saving for Retirement
One of the more unique changes in SECURE 2.0 is the option for employer plans to credit student loan payments with matching donations to 401(k) plans, 403(b) plans, or Simple IRAs. Government employers will also be able to contribute matching amounts to 457(b) plans.
This means people with significant student loan debt can still save for retirement just by making their student loan payments, without making any direct contributions to a retirement account.
The new regulation will take effect in 2025.
Changes for Employers
Starting in 2025, any new 401(k) or 403(b) plans must automatically enroll workers who don’t opt-out.
Contributions from workers automatically enrolled will start at a minimum of 3% and a maximum of 10%. Beginning January 1, 2026, those amounts will go up 1% each year until they reach a range of 10% to 15%. Retirement plans created before 2025 will not be subject to the same requirements.
Employers will have the option to offer employees “pension-linked emergency savings accounts” that will act as hybrids between emergency and retirement savings. Employers can automatically enroll workers at up to 3% of their salary with a contribution cap of $2,500.
Contributions to these emergency accounts will be taxed like Roth contributions and will qualify for employer matching. Employees can make four withdrawals per year from the account with no penalty or additional taxes. If they leave the company, they can withdraw the emergency account as cash or roll it over into a Roth account.
Other changes for employers will allow companies to automatically transfer a participant’s IRA into a retirement plan at a new employer unless the participant specifically opts out. Retirement plan administrators will have the option whether to recoup overpayments accidentally made to retirees, and it enacts protections and limitations for retirees if companies do decide to take money back.
Lost Retirement Accounts
There are millions of orphaned employer retirement accounts in America. Employees change jobs and forget they have money in the retirement plan of a previous employer. SECURE 2.0 mandates the Department of Labor to create a national, searchable database of retirement plans to help people find lost or misplaced accounts. The agency will be required to launch the database within two years.
The Employee Retirement Income Security Act of 1974 will also get an update. ERISA establishes minimum standards for administrators of private retirement plans, including communication with participants.
The ERISA rule change will require private retirement plans to provide participants with at least one paper statement a year unless the participant opts out. The rule won’t take effect until 2026, however, and won’t impact the other three quarterly statements required by ERISA.