In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses SECURE 2.0, which includes numerous provisions related to retirement plans.
SECURE Act 2.0 Finally Becomes Law
Hey everyone, Adam Bergman here, tax attorney and founder of IRA Financial. On today’s podcast, finally, we got the SECURE Act 2.0 after various House, Senate bills, different versions, finally, the biggest piece of retirement legislation probably in over three years is upon us. President signed it into law and this is a monster retirement semi/quasi-bill. It’s part of the monster 4000+ page, $1.7 trillion spending bill, the omnibus bill. So, the SECURE Act 2.0 is tucked into it, and it’s a monster. It’s almost 400 pages, literally from 2046 to page 2404. So, I’m here to simplify it, summarize and go through 20 or so of the most important provisions for IRAs Self-Directed IRAs, Solo 401(k)s and 401(k) plans.
There’s over 90 provisions in the SECURE Act 2.0, which is part of the broader $1.7 trillion spending bill to keep the government running. Kind of crazy how they’re doing this; literally jamming it down everyone’s throat. Literally zero time to debate it and discuss it. It’s 4000+ pages that probably no member of the House, no senator, and definitely the President of the United States, never, ever read through this. I tried to read through 400 pages of the retirement legislation, and let me tell you, it was not fun. I felt like I was back, forget about law school, I was, felt like I was back being a tax associate, trying to digest all this stuff. But I did it! And I did it just for you guys. So here it is.
Let’s start with the most monumental provision, and that is increasing the RMD, the requirement minimum distribution age, from 72 to 73, beginning right away in January 1, 2023, and up until 75 in 2033. So, over the next ten years, we’re going to go from 72 to 75 years old. But most importantly, starting right away, January 1 for 73 years old. So, if you turn 73 in 2023, you don’t have to, well, you should say, you don’t have to if you turn 72 in 2023, you don’t have to take RMD. So, it pushes that year forward another year from 72 to 73, but that starts right away, January 1, 2023.
The next provision, I put this kind of in what I thought are the most important provisions, but don’t hold me to it. The next one: requiring that catch-up contributions for SIMPLEs, other than SIMPLEs, be made in Roth. So, if you make catch-up contributions in a 401(k) and you have less than $145,000, the Roth contribution; so, let me rephrase that. If you make more than $145,000, your catch-up contributions, which is for employee deferrals in ’23, the $7,500, needs to be in Roth. Why? They’re trying to limit the ability of high income earners to get tax deductions. Although $145,000, I’m not sure you consider that high income earner. But, if you make less than $145K, your catch-up can still be in pretax or Roth; if you make over $145K, got to be in Roth, and this is just part of the “Rothification” of the tax code. Even though Roth ultimately help taxpayers long term, because you don’t pay tax once you’re over the age of 59 1/2 on your distributions, it certainly will help Treasury, short-term because there’s no deductions. Deductions reduces taxable income, so all politicians are very in favor of Rothification because it helps them pay for things because there’s no reduction in tax revenue.
This is a cool thing. Next one, higher catch-up contributions for individuals who are ages 60-63. Okay, so under current law, if you are over 50, you get a catch-up contribution, right? Whether it’s $7,500 for 401(k) plans, $3,500 for SIMPLEs or $1,000 for IRAs, the new bill will increase it from 60 to 63. So, increases the term limit, the limit from either $10,000 or 50% or more than the regular catch-up contribution in ’25. And that’s for ages 60, 61, 62 and 63. They are indexed for inflation after 2025. So, this becomes effective in 2025. So it’s not for ’23 or ’24. And the SIMPLE IRA contribution goes from $3,500, it would be up to either a greater of $5,000 or $5,250 in 2023. So again, this is very good because this is prime retirement age 60, 61, 62, 63. This is hopefully when you’re making good amount of money, you can sock away a chunk of money and they’re going to give us the ability to go $10,000 or 50% of the regular catch-up contribution in 2025. But again, this is going to start in ’25.
This is interesting. For anyone with a 529 plan, if you have excess contributions, meaning there’s nowhere to spend it anymore, there’s no more qualified education, the kids are done with school or grandkids aren’t starting school yet, you can always move it into a Roth IRA up to the limit. So, every year you can do, let’s say, $6,500 or $7,500 if you’re over 50 from the 529 into the Roth, instead of having that excess money taxable, want to wait, you can push it into a Roth IRA. That’s pretty cool.
The next one is allowing SIMPLE and SEP contributions to be in Roth, right? Now, the SIMPLE, which is $15,500 in ’23 plus the $3,500 or catch-up or a SEP, which is a profit sharing plan, which is 20% of your comp or 25% of W-2 up to $66,000 in 2023. That has to be pretax. They’re letting you do it in Roth. Again, Rothification, all about turning pretax into Roth to limit deductions.
They are going to allow Roth 401(k)s to basically not have RMDs. Now, there’s no RMDs for Roth IRAs, but for Roth 401(k)s, there’s still this dumb RMD rule, which you can get around by just rolling the Roth 401(k) into a Roth IRA, but they’re just going to solve that problem.
They’re going to index IRA catch-up contributions for inflation. It’s about time! So, we’re not going to be capped at that $1,000 if we have high inflation. Right, $6,500? $7,500 if you’re over 50. That’s going to go up a lot, hopefully, well, I shouldn’t say hopefully because that means there is high inflation, but something to consider.
They’re changing the rules for auto enrollments into 401(k) plans. Basically, they want to make it easier and they want to make the escalation higher. So, auto enrollments going to be a minimum of 3% and a max of 10%, and they’re going to auto escalate one percentage point per year up until 10%. The idea is if you auto enroll people, they’re generally going to save more because they’re not even aware that they’re saving for retirement. So, the more they do this, the easier it is, and obviously the more money they’ll have in their retirement plan. This is not going to be for Solo Ks, SIMPLEs will not be part of this. So, it’s really for just regular old 401(k) plans. Pretty interesting provision.
The next thing is they’re going to change how the savers match credit, now, this is generally for income filers make $71,000 or less married file jointly. They’re going to change the way the saver credit is given. And instead of just giving you a credit, they’re going to dump 50% of it into an IRA, up to $2,000. And it’s a good concept, right? They’re going to need to kind of figure out the procedures for doing this and getting the money from the IRS into your IRA, but the idea is that, hey, instead of just giving you credit, let’s actually give you cash in your IRA. This was something I actually wrote about and actually sent multiple communications to the IRS on this. This is a really good thing because instead of just giving you a credit to reduce tax when you make $71,000 or less, like you’re not paying that much tax anyways, here they’re actually giving you money. They’re giving you cash in a Roth IRA. So it’s a really, really cool provision and I’m super in favor of it.
Next thing is they’re doing a retirement savings lost and found. And just so you know, I did a whole blog on this, which I’m sure if you Google SECURE Act 2.0 Self-Directed IRA, it will be the first thing that pops up, but this will be on our news section, on our website. There’s a lot to digest. I know. I’ll actually include the link in the description so you can check it out and kind of read through it and more leisurely because I’m going through it quite quickly because I know people don’t want to hear me talk for an hour on these provisions. You’d rather digest it on your own time, which is fine. So just an FYI, I’ll put that in the link.
They’re going to do a retirement savings lost and found. It’s going to be run by the DOL because there’s billions of dollars lost to job transitions, where people just literally change jobs and they don’t even know they’ve been auto enrolled in a 401(k) and the money sits there and gets lost. So, hopefully this will help them find it
Safe Harbor IRAs, it’s part of the lost and found. A lot of people don’t realize they leave a job and they have less than $5,000, which is now $7,000, a lot of 401(k)s will send it to an IRA custodian, who’s supposed to look for you, not always successfully. And generally the IRA just gets depleted for fees, so they’re going to make it easier to move through the Safe Harbor IRAs and hopefully you can now find that money through this lost and found.
They’re going to do something, also, next provision, on finance emergency savings. So up to $1,000, this is effective for 2024, you’re going to be allowed to take $1,000 out without the 10% penalty. One emergency distribution per calendar year. You know, $1,000. Whoop-dee-doo! Honestly, the way things cost today, yeah, it’s great, but it doesn’t really do much, right? If you got severe medical expenses and things like that, I guess you can always do a hardship, but they’re giving you an extra $1,000. Hopefully it will help, but not super focused on that.
They’re also letting you set up emergency savings accounts up to $2,500, part of a 401(k) plan. It’s going to be treated as Roth contributions that you can pretty much take out anytime you want, penalty-free. So, that’s pretty cool. And the highly compensated will not be part of this plan, but it’s like a little emergency plan that you can sock away, have it grow without tax and use it if you need it. Kind of a better idea than the emergency savings plan.
They’re doing new startup credits for 401(k)s, giving you an even bigger incentives if you’re a small business owner to save; basically doing a credit from 50% to 100%. So again, I’m giving members of the Dems, the Republicans, Ways and Means Committee, Senate Finance Committee a lot of credit for incentivizing retirement savings. This is really good. This is a great bill. Just for the record, I am super in favor of literally almost every provision in this bill. Unlike SECURE Act 1.0, which was passed December 19, 2019, which had stretch IRA provisions I didn’t love, and some other stuff, I actually liked every provision in this bill. It’s a great bill and I commend members of the Ways and Means and Senate Finance on both sides of the aisle who work together.
They’re doing also something interesting, they’re going to allow employers to make vested, matching, non-elective contributions as Roth as part of 401(k)s. So, this is an interesting thing. If you’re doing non-elective contributions, you’re going to be able to do this in Roth, as well.
Next thing which is good for IRA prohibited transactions. Right now, if you do an IRA prohibited transaction, you get caught, your whole IRA, all the assets in that particular IRA gets blown up. They’re going to change this to act more like a 401(k) so that if you do a prohibited transaction, only the IRA assets associated with that specific prohibited transaction will get blown up. Everything else will stay intact. So that’s pretty good.
Next thing, they’re doing something that helps student loans. They’re going to let 401(k) employers, doing matching contributions, use some of those funds to help pay student loans. Kind of treat it the same as a matching contribution, nontaxable for student loans. And it’s going to be for purposes of non-discriminate nation and safe harbor rules, be permitted to make matching contributions for student loans instead of just going into your 401(k). So, pretty cool stuff.
They’re also going to allow you to do like, cool little incentives for making 401(k) contributions, like $25 gift cards, things like that. They’re going to make it easier to incentivize people to save, which is cool. I’m all for it.
They’re going to make self-certification of hardships easier. Now, if you have a hardship, meaning you want to take money out of an IRA or 401(k), especially a 401(k), for significant financial need, severe financial hardship, you have to go through your employer. It’s kind of a pain. Now they’re going to make self-certification a lot easier. So, that’s pretty cool.
God forbid, domestic abuse, they’re going to let you take penalty-free withdrawals.
If you screw up RMDs, which we did during COVID. People get older, they don’t understand the RMD rules. Now, there’s a 50% excise tax on what you fail to take in as a taxable distribution. Theyre going to reduce that to 25%, which is pretty good.
This is important for Solo 401(k)s. Right now, to be deemed a full-time employee, it’s either 1,000 hours or two consecutive, sorry, three consecutive years of 500 hours or more. They’re going to change that to two consecutive years of 500 hours or more or 1,000 hours during the year. Why? To make more employees eligible to be part of a 401(k). This could hurt Solo 401(k) plans because, obviously three years of 500 hours is going to be harder to satisfy than two years of 500 hours. So, it could turn some Solo Ks into full term ERISA plans, which again, members of the House and senators wanted more people to be participants in a 401(k).
They also want to allow, they’re going to give you penalty tax exceptions if you’re terminally ill, take money out of a plan; that should have been part of the same idea as domestic abuse. That should be a no brainer. So I’m happy they’re doing it.
They’re going to do some stuff for SIMPLE IRA contribution limits. If you have an employer with up more than 25 employees, they’re going to basically increase the catch-ups, which is pretty good. So, another thing, although SIMPLEs, aren’t too popular. They’re going to let you, if you have a SIMPLE, terminate at mid year, which you’re not allowed to do now, as long as you go into a 401(k). Again, transitioning, making it easier for businesses to offer 401(k) plans.
And the last thing, which was kind of not well understood, is if you do excess contributions to an IRA, right? You screw up, you do an excess contribution, there’s an excise tax, but there was a question whether the 10% early distribution penalty will apply. Well, the answer it doesn’t apply. You pay the excess tax, but you don’t pay a 10% penalty on top. So, that’s something that’s now clear.
So, like I said, there’s a lot to digest. I broke down out of the 90+ provisions like 25 or so that I thought were useful and the most important. I would not suggest going through 400 pages in this bill. It’s a nightmare. It’s written literally by not even lawyers, by actuaries. It’s so hard to digest. But, I got it. This is all you’re going to need to know. I’m going to put description in this podcast for the blog I wrote that summarizes all this in detail so you can go back through it and kind of check out what you missed, or if I spoke too quickly or didn’t focus on a particular area that you had a question on. Hopefully, my blog will address it. If not, obviously reach out to us, info@irafinancial, or if you’re a client, you know where to find us and we’ll obviously answer any more questions you have.
There’s also a YouTube Live video on this, which I’ll go through in more detail, all of these provisions. So, we’re going to tackle this SECURE Act 2.0 in much more detail over the coming months, so don’t worry about it. But, the only thing that’s going to start immediately is the RMD. So, if you turn, you know, 72 in 2023, you got another year. Whereas, if that provision wasn’t in, you would start taking RMDs ’24, April 1. So, you’re going to have that extra year of time.
So, all in all, really good bill, super supportive of it, good stuff. And again, shows members of the House, both sides of the aisle, senators on both sides work together. It’s such a pleasure to see when members of the House, senators work together to get things done. Gives you hope for Washington. Again, obviously, this is not a big, controversial issue like gun rights or abortion, things like that we’re not sure we’re ever all going to agree on. Retirement savings, most of us, all of us can agree it works because it’s based off mathematics and it’s less controversial than abortion, gun rights, things like that. So, it gives me a lot of confidence that the people in Washington really want to do what’s right and this is a perfect example of that.
Now, on the flip side, maybe we all should have a little bit more time to digest this 4,000 page omnibus bill, but now it works. We got to keep the government funded and we just didn’t have a lot of time. Plus, obviously, Christmas, storms brewing across the country., Members of the House, senators want to get home, be with their families on Christmas, so didn’t have much debate and it is what it is.
So, hope you guys enjoyed today’s podcast. I appreciate it. Happy Healthy New Year. I hope you’re having an amazing Christmas holiday season and talk to everyone again next week. Take care. Happy holidays.