Making sense of the SECURE 2.0 Act of 2022

On December 29, 2022, as part of a bipartisan spending bill, the SECURE 2.0 Act of 2022 (SECURE 2.0) was signed into law by President Biden. This new act built upon the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act of 2019), which was the first major overhaul of retirement-related legislation since 2006. In this article, we’ll summarize some of the key provisions of the new law and discuss what they might mean for you. Please note that this article does not address all the provisions of SECURE 2.0. 

Every person’s situation is unique, and because E*TRADE is not a legal or tax advisor and does not provide legal or tax advice, we encourage you to talk with your legal and/or tax advisor about SECURE 2.0 and how it will affect you and your retirement accounts.

SECURE 2.0 includes over 90 provisions with staggered effective dates that modify or impact sections of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code). Many of these provisions are related to Individual Retirement Accounts (IRAs) and qualified retirement plans, and may impact how you save for retirement and use your retirement savings over time.

Many of the provisions of SECURE 2.0 go into effect right away. One of the biggest of these is the age at which required minimum distributions for IRAs and qualified retirement plans must commence (RMD Age),¹ which increases to age 73 in 2023 and then age 75 in 2033.² Here’s an overview of the changes now in effect:

Increase in the required minimum distribution (RMD) age

The RMD Age was raised for many individuals to 73 or 75, depending on when the individual was born:

• Individuals born before 1951 are not affected by this change because they’ve already reached RMD Age.
• For individuals born after 1950, but before 1960, the RMD Age has increased to age 73. As a result, if you were born in 1951 and turn age 72 in 2023, you will not receive an RMD page on your December 2022 statement.
• For all other individuals, the RMD Age has increased to 75.

Reduction in RMD excise tax

The excise tax penalty for failure to distribute RMDs has been reduced to 25% of the shortfall—or potentially 10% if the shortfall is corrected within a two-year window. This is effective for tax years beginning after December 29, 2022.

Changes related to qualified charitable distributions

SECURE 2.0 allows individuals to make a one-time election to treat up to $50,000 (indexed for inflation) in IRA distributions paid directly to certain split-interest entities (i.e., certain charitable remainder annuity trusts, charitable remainder unitrusts, and charitable gift annuities) during a single tax year as qualified charitable distributions, provided that certain requirements are met (e.g., such an election is not in effect for any preceding taxable year). Additionally, the annual IRA qualified charitable distribution limit of $100,000 will be indexed for inflation.

Repayment period for qualified birth or adoption distributions

To qualify as rollover contributions, qualified birth or adoption distributions from IRAs and qualified retirement plans must now be repaid within three years of distribution. For distributions taken prior to enactment of the new law, the repayment period ends on December 31, 2025.

Exemption from the early distribution penalty tax for the terminally ill

Individuals certified as terminally ill (as defined under the Code) by a doctor can now qualify for an exception to the 10% early distribution penalty tax on distributions from IRAs and qualified retirement plans.

Automatic relief for federally declared disasters

SECURE 2.0 makes permanent automatic relief for federally declared disasters, including as follows:

• Distributions from IRAs and qualified retirement plans are now permitted in amounts up to $22,000 per affected individual per qualified federally declared disaster. These distributions are exempt from the 10% early distribution penalty tax and may be repaid within three years. Inclusion of the distributions in gross income may be spread out over a three-year period.
• Distributions to affected individuals from IRAs and qualified retirement plans for certain home purchases may be repaid subject to certain conditions.
• Loan amounts from qualified retirement plans for affected individuals may be increased and the repayment period extended.

Roth contributions to SIMPLE and SEP IRAs

SECURE 2.0 permits SEP and SIMPLE IRAs to be designated as Roth IRAs and accept Roth contributions under the SEP and SIMPLE IRA plan beginning in 2023. However, because additional guidance from the IRS will likely be required before implementation, this provision will not be available in practice until a later date.

Tax credits for retirement plan start-up costs

The tax credit for small employers—with 50 or fewer employees—starting a new plan has increased from 50% to 100% per year (up to $5,000) for the first three years. An additional credit for certain small employers starting a new plan (other than a defined benefit plan) is also available for the first five years, up to $1,000 per employee equal to the applicable percentage of employer contributions to an eligible employer plan. The full additional credit is available to employers with 50 or fewer employees and phases out for employers with between 51 and 100 employees.

Other significant provisions of SECURE 2.0 come online in 2024, including distributions of up to $1,000 for unforeseen emergency expenses (exempt from early distribution penalty tax). For details and restrictions, see “Emergency expense distributions” below.

Tax-free rollovers from 529 plans to Roth IRAs

Subject to certain requirements, certain assets held in a 529 qualified tuition plan account can be rolled over to a Roth IRA maintained for the benefit of the designated beneficiary of that 529 plan—and do so without incurring income taxes or tax penalties. This transaction, however, is subject to certain conditions and limitations, including annual Roth IRA contribution limits, a $35,000 lifetime limit, and a requirement that the distribution be from a 529 plan of a designated beneficiary that has been maintained for a 15-year period ending on the date of such distribution.

Withdrawals for survivors of domestic abuse

Domestic abuse survivors may make certain penalty tax–free withdrawals of up to the lesser of $10,000 (indexed for inflation) or 50% of their IRA or vested account value under certain qualified retirement plans. The withdrawal may be repaid within three years.

Emergency expense distributions

Subject to certain restrictions, SECURE 2.0 allows for one penalty tax–free withdrawal from an IRA or certain qualified retirement plans during a calendar year of up to $1,000 for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” This distribution may be repaid within a three-year repayment period, which begins the day after such withdrawal. No subsequent withdrawals made during the three calendar years immediately following the calendar year of an emergency expense distribution (the first distribution) may be treated as an emergency expense distribution, unless the first distribution is repaid during the three-year repayment period or certain other conditions are met.

Inflation indexing for IRA catch-up contribution limits

The contribution limit for IRA catch-up contributions will be indexed for inflation in $100 increments in the same manner as regular IRA contributions.

Modifications to SIMPLE IRA contribution rules and limits

Employers will be allowed to make additional nonelective contributions for each participant in a uniform manner up to the lesser of 10% of compensation or $5,000 (indexed for inflation).

Increased Deferral and Catch-up Contribution Limits

Effective for the 2024 tax year, the annual deferral limit is increasing to 110% of the 2024 SIMPLE IRA plan limit (as indexed) and the catch-up contribution limit at age 50 is increasing to 110% of the 2024 SIMPLE IRA plan limit (as indexed) in the case of an employer with no more than 25 employees. Employers with 26 to 100 employees are permitted to provide these higher deferral limits, provided that the employer either provides a 4% matching contribution or a 3% employer non-elective contribution.

Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions

Beginning in 2024, the SECURE 2.0 Act allows employer matching contributions to be made on behalf of employees with respect to "qualified student loan payments."

Mid-year Termination of and Rollover from SIMPLE IRA

Effective for 2024, an employer may elect to replace a SIMPLE IRA plan with a safe harbor 401(k) plan at any time during the year, subject to certain rules.

Increased involuntary cash-out limit

The involuntary cash-out limit will be increased from $5,000 to $7,000. This means that employers will be able to distribute and directly roll over former employees’ retirement plan assets to an IRA without employee consent, as long as the employee’s retirement account balance is no greater than $7,000 (up from $5,000 previously).

Distribution rules for designated Roth accounts under qualified retirement plans

The lifetime minimum distribution requirement will be eliminated for designated Roth accounts in qualified retirement plans. The after-death required minimum distribution rules, however, will continue to apply.

There are also a number of provisions of SECURE 2.0 that come online in 2025:

Automatic enrollment in new 401(k) and 403(b) plans

Automatic enrollment for eligible participants in new 401(k) and 403(b) plans will become mandatory, in many cases, with an initial minimum enrollment amount of 3% (but no more than 10%) and automatic escalation of 1% per year up to a minimum of at least 10% (but no more than 15%), unless the participant affirmatively elects otherwise.

Increased catch-up contribution limits for certain plan participants

For participants in an applicable employer plan (other than a SIMPLE plan) who are age 60 to 63 before the close of the taxable year, the catch-up contribution limit will increase to the greater of $10,000 or 150% of the regular catch-up contribution limit in effect for 2024. For participants in SIMPLE plans who are age 60 to 63 before the close of the taxable year, the catch-up contribution limit will increase to the greater of $5,000 or 150% of the regular SIMPLE plan catch-up contribution limit for 2025.