A sweeping retirement package signed into law last December overhauled how Americans plan and save for retirement. With the April 18 federal tax filing deadline behind us, investors and financial advisors are reviewing provisions that will affect tax planning for this year and the future.
Millions of savers—from top earners to gig workers—face new incentives and restrictions on their retirement accounts. Some changes take effect in 2023, while others will roll out gradually through 2033.
SECURE 2.0 builds on the 2019 SECURE Act (Setting Every Community Up for Retirement Enhancement). Both laws use behavioral economics, showing that nudging savers to accumulate wealth often works better than enforcing strict rules. Greg Wilson, a partner at Goldman Sachs Ayco, said the law will help Americans prepare for retirement amid challenges that can derail savings.
Here are seven of the most significant provisions:
Roths
Roth accounts are now more attractive. Employers can allow employees to make employer-matching and non-elective contributions as after-tax Roth contributions instead of pre-tax. Contributions are made with dollars that have already been taxed. While there’s no deduction, withdrawals of compounded gains are tax-free once the account holder is at least 59½ and has held the plan for five years. About 90% of 401(k) plans now offer Roth options, and roughly 30% of eligible employees contribute. For 403(b) plans for teachers, participation is just under 60%.
Required minimum withdrawals
Savers now have more time to grow their retirement accounts before taking distributions. For 2023, individuals with traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and similar plans must start taking RMDs at age 73. The 2019 law had raised the age to 72, and in 2033, it will rise to 75. Roth IRA owners do not have to take RMDs. Roth 401(k) holders must take a distribution in 2023, but starting in 2024, they can let the money grow tax-free for life. Savers turning 72 this year can delay their first distribution until 2024 or 2025. Those who took an RMD under the old law can roll it back within 60 days or request an IRS waiver.
RMD penalties
Starting this year, the steep penalty for failing to take an RMD falls by half, to 25% of the amount not taken from 50%. The penalty is slashed to 10% if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a “timely manner.” That means either in the second year after the RMD was missed or before the IRS assesses a penalty, whichever comes first.
Early withdrawal penalties
Savers who pull money out of their IRAs before age 59½ are socked with a 10% penalty on the amount withdrawn, calculated at their ordinary rate. While exceptions exist, SECURE 2.0 added new ones, easing the pain.
People in federally declared disaster areas can withdraw up to $22,000 from an IRA or workplace retirement plan with no penalty. The tax owed can be paid over three years.
Savers can also make penalty-free withdrawals if they are terminally ill. Come 2024, they can pull out $1,000 to cover a financial emergency, $10,000 if they are a victim of domestic abuse and $2,500 if they have an emergency savings account that’s tied to their retirement plan. In 2025, they can take out penalty-free up to $2,500 to cover long-term care expenses.
Catch-up contributions
Savers age 50 and older can contribute an extra $7,500 per year to 401(k) accounts in 2023. For ages 60–63, the limit rises to $10,000 starting in 2025.
High earners (over $145,000) must make after-tax contributions starting next year. IRA catch-up contributions are $1,000 in 2023 and will index to inflation in 2024.
Other updates include:
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One-time $50,000 charitable distributions for savers 70½ or older in 2023
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Increased SIMPLE IRA limits in 2024 for employers
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Automatic 401(k) plan transfers for job changes
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Mandatory plan access for part-time employees starting in 2025
529 plans
The December 2022 law lets owners of 529 college savings plans redirect up to $35,000 of any unused dollars to a Roth IRA come 2024. The shift will morph leftover money originally intended for a child’s college (or kindergarten through 12th grade) costs into retirement dollars, all without socking the saver, or the beneficiary, with a tax bill. The 529 owner will need to have had the account for at least 15 years and is subject to the annual Roth contribution limits.
