On December 29, 2022, the SECURE 2.0 Act was signed into law. SECURE (Setting Every Community Up For Retirement Enhancement) 2.0 clarifies certain portions of the SECURE Act of 2019 and expands its provisions to cover additional matters. Here we will discuss some of the new provisions under SECURE 2.0 Act.
One provision of the SECURE 2.0 Act is a provision for permanent disaster withdrawal rules for Defined Contribution Plans (DC) as well as Individual Retirement Accounts. The maximum amount that can be withdrawn from these plans is limited to $22,000 per disaster. The taxable amount will be included in income over the next three years but is exempt from the 10% early withdrawal penalty, direct rollover requirements and the mandatory 20% federal tax withholding.
The Required Minimum Distribution (RMD) age has increased from 70 ½ to 72 if you were born after June 30, 1949. For employees born after December 31, 1950 but before January 1, 1960, the RMD has been increased to 73 and for those born after December 31, 1958, the RMD is now 75. Since those born in 1959 are subject to both the RMD age of 73 and 75, clarification is expected from the IRS.
There is now an exception to the penalty for early distributions from qualified plans prior to reaching age 59 ½ for those suffering from a terminal illness. If the patient’s doctor certifies that the individual has a terminal illness or condition that will reasonably result in their death within 84 months and the patient is eligible for a distribution under the plan, there will be no 10% penalty for this distribution.
One interesting new addition to the SECURE 2.0 Act is that there is now a provision for penalty-free withdrawals for victims of domestic violence. This is to allow these victims to remove themselves from these dangerous situations as well as to get back on their feet. The amount of the withdrawal cannot exceed $10,000 or 50% of the participant’s vested account balance. These withdrawals are also free from the direct rollover requirements and the 20% federal tax withholding requirement. The participant may also repay the distribution to the retirement plan or IRA within three years.
A few other requirements under SECURE 2.0 Act are the mandatory automatic enrollment for new 401(k) and 403(b) plans after December 31, 2024. Under the provisions of the eligible automatic enrollment arrangement (EACA), participants must be automatically enrolled at an initial rate of 3% (but not more than 10%) and increased each year by 1% to at least 10% (but not more than 15). These contributions must be invested in a qualified default investment alternative (QDIA). These automatic enrollment provisions do not apply to plans established before December 29, 2022, SIMPLE 401(k) plans, governmental or church plans and plans maintained by employers having 10 or fewer employees.
It seems apparent that most Americans simply do not and will not have enough money saved to last through their retirement years since we are living longer. While the full retirement age has increased from 65 to 67 (depending on the age of the employee), most American men will live until they are 74.5 years old while American women will typically live until their early 80’s. It is likely that social security payments will not support most Americans in retirement at the same level of living that they may have enjoyed prior to retirement. This is what has caused Congress to enact the SECURE Act and the SECURE 2.0 Act.
In part, the SECURE Act and SECURE 2.0 Act are intended as measures to make it easier for Americans to save money while working while getting a tax break at the same time since contributions to defined benefit plans and IRAs are typically excluded from gross income, up to the mandated levels, each year. For 2023, the 401(k) contribution limits are $22,500 or $30,000 if you are 50 or older.
One thing we always do at our firm is to encourage our younger employees, many with their first full-time job, to participate in our 401(k) plan and save for their retirement – it is never too early to start planning for retirement!