The lack of retirement preparation and concern among Americans has captured the attention of Washington policymakers. On December 29, 2022, President Biden signed a $1.7 Trillion budget bill, which included a substantial number of changes/modifications to the original 2019 Setting Every Community Up for the Retirement Enhancement (“2019 SECURE”) Act resulting in the more appealing Securing a Strong Retirement Act of 2022 (“SECURE 2.0”). With more than 90 provisions affecting retirement planning, the SECURE Act 2.0 provides options which may result in a more advantageous and effective approach for Americans, individuals, businesses owners and employees, to plan for retirement This article highlights ten (10) of the significant provisions in the SECURE Act 2.0 as the changes present opportunities for revisiting tax planning and retirement planning strategies.

1. Required Minimum Distribution Age Increase and Penalty Decrease

The 2019 SECURE Act originally required minimum distribution (“RMD”) to begin once an individual attained the age of 72. The SECURE Act 2.0 increases the age to 73 as of January 1, 2023, with further increases to age 74 in 2029 and age 75 in 2032.

Under the 2019 SECURE Act, failure to comply with RMD requirements resulted in excise tax equal to 50% of the year’s RMD. SECURE 2.0 decreases the penalty to 25% of the year’s RMD, if the taxpayer immediately corrects the issue.

2. Increased Catch-Up Contributions

Catch-up contributions allow employees of a certain age to set aside additional dollars over the standard maximum contribution amount to workplace retirement plans and IRAs. Starting January 1, 2025, one option allows employees age 60 through age 63 to contribute the greater of $10,000 or 50% more than their regular catchup amount to their 401(k) or 403(b) plans. If an employee earns more than $145,000 in the prior year and is over the age of 50, all catch-up contributions will need to be made to a Roth IRA.

3. Expanded Qualified Charitable Distributions

Anyone over the age of 70.5 is allowed to distribute up to $100,000 per year to charity from an IRA through a Qualified Charitable Distribution (“QCD”). This method can satisfy the RMD requirement and is not included in an individual’s taxable income. These gifts to charities must be made to a qualified charity, with the exception of a one-time $50,000 gift to a charitable trust, charitable or gift annuity, charitable remainder unitrust or a charitable remainder annuity trust. This exception does not include gifting to private foundations and Donor Advised Funds (“DAF”). In addition, the gifts must be made directly from IRAs by the end of the calendar year.

4. Expanded Beneficiary in Special Needs Trusts

The 2019 SECURE Act originally placed limits on whether a Special Needs Trust (“SNT”) would qualify as an Eligible Designated Beneficiary (“EDB”) for IRAs if a charity was named as a contingent beneficiary of the SNT. SECURE 2.0 has expanded on the definition of a SNT as an EDB and allows a SNT to name a charitable organization as the remainder beneficiary.

5. Automatic 401(k) Enrollment

As of January 1, 2025, many employers will be required to automatically enroll employees in the workplace 401(k) plan at a rate of 3-10% of their salary. Employees will have the option to opt-out. However, this provision only applies to new plans for employers with over 10 workers that have been in business for at least 3 years.

6. 529 plans

On January 1, 2024, SECURE 2.0 will allow 529 plans to be rolled over to a Roth IRA in the beneficiary’s name subject to limitations. The rollover is subject to the annual Roth contribution limits ($6,500 in 2023) and capped at $35,000 over the beneficiary’s lifetime. Furthermore, the 529 plan must have been open for at least 15 years.

7. Matching Student Loan Debt

Employers will be able to make contributions to employee student loan payments through 401(k), 403(b), governmental 457(b) and savings incentive match plans. This will give employees an extra incentive to save for retirement while paying off student loans.

8. Matching Roth Contributions

Prior to the recent changes to the 2019 SECURE Act, employer contributions to employer-sponsored plans were made on a pre-tax basis. Employers will now be able to provide employees with the option to receive vested matching contributions to Roth 401(k) accounts. RMDs from an employer-sponsored plan are required for Roth accounts until 2024.

9. Penalty- Free Early Withdrawals

Under the 2019 SECURE Act, the 10% penalty for early withdrawals from workplace savings plan to cover expenses, such as child birth and adoption, was waived, provided the borrowed amount was repaid to the plan. There was no deadline for repayment. SECURE 2.0 now imposes a deadline of 3 years to repay withdrawals to avoid any penalties.

In addition, there are penalty-free withdrawal situations for “Hardships” such as for individuals who currently or have been subject to domestic abuse, distributions to terminally ill plan participants and distributions to pay premiums on particular types of long-term care contracts.

10. Emergency Savings Provisions

Starting in 2024, some retirement plans may incorporate an “emergency savings account”. The emergency savings account would be similar to a Roth 401(k) account for non-highly compensated employees. Employee contributions would be limited to $2,500 annually or lower, depending how the employer set up the plan. Participants can make up to one withdrawal per month and the first 4 account withdrawals made in a year would be tax and penalty free.

The above ten changes in SECURE Act 2.0 represent significant modifications that may present opportunities for you to revisit your retirement planning strategies, including trust and estate planning. Our attorneys in the Private Client Services practice at Wilchins Cosentino & Novins work with individuals, employers and employees to take advantage of these opportunities as well as to add greater flexibility to Supplemental Needs Trust Planning. We are here to help evaluate and navigate the implications of SECURE Act 2.0, working with other trusted advisors for a comprehensive plan for you, including your family and your business.

To learn more and discuss your situation, please contact us or contact one of our attorneys in the Private Client Services practice at Wilchins Cosentino & Novins or call 781-235-5500.