Detailed Breakdown of SECURE Act 2.0

SECURE ACT 2.0 is aimed to help taxpayers bolster their retirement savings and help strengthen their long‐term financial security. The bill includes provisions to make it easier for small businesses to offer retirement savings plans and provides benefits to offset costs associated with establishing one. 

Ultimately the provisions will help employees build retirement savings that can last a lifetime.

Most Impactful Provisions:

Increase in Required Minimum Distributions (RMD) age

RMD beginning date rises to age 73 from 72 starting in 2023. Will rise again to age 75 in 2033.

Expanded Roth contributions

• Roth Contributions are now allowed for SIMPLE and SEP IRAs beginning in 2023
• Employer contributions and employee deferrals (if allowed) can be designated as Roth.

Eliminate RMDs for Roth 401(k) accounts

Required distributions will no longer need to be taken from Roth 401(k) accounts starting in 2024.

Increased catch‐up contributions

Currently, individuals age 50 or older are allowed to contribute additional funds into qualified retirement plans. Starting in 2025, individuals between the ages of 60 and 63 will be able to contribute the greater of $10,000 or 50% more than the catch‐up contribution amount for 2024. Catch‐up contributions will be indexed for inflation starting in 2025. IRA catch‐up contributions will also be indexed to inflation starting in 2024 for those age 50 or older.

Automatic enrollment for 401(k) plans

Starting in 2025, 401(k) and 403(b) plan participants are automatically enrolled in the plan once they are eligible. The requirements are:

• Initial deferral contribution level of 3% of compensation
• Each year contributions increase 1% until it reaches 10%

Student loan matching program

Student loan payments can be treated as employee deferrals for purposes of employer match contributions. This provision is effective for plan years after December 31, 2023.

Reduce RMD Excise tax

Excise tax for failure to take a required distribution is currently at a 50% rate. The Act reduces this to 25% starting in 2023.

Roth catch‐up contributions

Beginning in 2024, individuals with incomes that exceed $145,000 will be required to have any catch‐up contributions treated as Roth contributions.

Emergency savings account

Beginning in 2024, employers can set up an emergency savings account where employees can save up to $2,500 in a Roth‐style account. Distributions will be treated like a qualified distribution from a Roth account (tax‐free if requirements are met).

Modification of the Saver's Credit

Currently, taxpayers can receive a tax credit for contributing to a qualified retirement plan or IRA if their incomes are below a certain level. Starting in 2027, the government will give a 50% credit on savings up to $2,000 ($1,000 maximum tax credit). The credit is refundable. This is to encourage those with low or moderate incomes to participate in retirement plans.

Qualified charitable distributions (QCD) expansion

Taxpayers who have attained age 70.5 years of age are permitted to have all or a portion of their RMD (up to $100,000) distributed directly to a charity and exclude the distribution from income (no charitable deduction either). The Act expands this to index QCDs to inflation starting in 2024 and allow a one‐time $50,000 distribution to a charity through a split‐interest entity (CRATs, CRUTs and charitable annuities).

529 Plan rollovers to Roth IRAs

Beginning in 2024, beneficiaries of 529 plans may roll over up to$35,000 during their lifetime to a Roth IRA. The amount rolled over each year is limited by the contribution limit for IRAs. In addition, to be eligible the 529 plan must have been open for more than 15 years.

Additional 10% penalty exceptions

Starting in 2023, taxpayers will be eligible to take up to $1,000 penalty free, in the case of financial hardship, from a 401(k) plan or IRA. The taxpayer has the option to repay the distribution within 3 years. No further distributions will be permitted during the repayment period unless the distribution is paid in full. Taxpayers that are victims of domestic abuse are also allowed the lesser of $10,000 or 50% of their account balance without penalty. A similar 3‐year repayment period is available as well.  Beginning in 2023, taxpayers diagnosed with a terminal illness will also be eligible to take distributions without the 10% penalty applying.

Increase in longevity annuities

Qualified Longevity Annuity Contracts (QLACs) were limited to 25% of the account balance (in aggregate for IRAs) or $145,000. The limit has been raised to a flat $200,000.

Optional Roth treatment of employer match or nonelective contributions

A qualified retirement plan [401(k), 403b) or 457(b)] that elects to make matching contributions or nonelective (discretionary) contributions may allow participants to designate all or a portion of those contributions to be Roth contributions. This will only apply to the extent that a participant is fully vested in these contributions. These same provisions are extended to SEP arrangements as well.

Other Provisions to Keep on Your Radar:

Modifications of small employer credits

Employers with less than 50 employees have been allowed a tax credit of 50% of the eligible expenses to start a qualified retirement plan, up to $5,000. The Act now expands this tax credit to 100% of the qualified start‐up expenses and is available for the first three years of the plan. Additionally, a new tax credit is available for employer contributions made to a qualifying plan up to $1,000 per eligible employee and is applicable for the first five years of the plan. This is effective for 2023.

Section 1042 deferral for stock sales to S corporation ESOP

Beginning in 2028, Shareholders of an S‐corporation will be allowed to defer up to 10% of the proceeds in the sale of their stock to an ESOP.

Part‐time worker coverage

Long‐term part‐time workers were provided the ability to participate in a 401(k) plan if they worked at least 500 hours per year with an employer for at least three consecutive years and had met the minimum age requirements (usually 21) under the former SECURE Act of 2019. The new SECURE Act reduces the number of years to two and clarifies that 12‐month years before 2021, are not taken into consideration for eligibility or vesting. The reduction in service requirement is effective for plan years beginning after December 31, 2024.

Retroactive first year elective deferrals for sole proprietors

The prior SECURE Act paved the way for employers to adopt a new retirement plan after the close of the tax year and make deductible employer contributions as long as they were made before the extended filing due date. However, 401(k) deferrals must have been made before the close of that year. Under SECURE 2.0 Act, if the unincorporated trade or business has only one employee, any elective deferral under a 401(k) plan made by that individual before the filing date of the individual's return for the tax year (without regard to any extension) will be treated as having been made before the end of plan's first year. This is effective for 2023.

Tax treatment for nontrade SEP contributions

Beginning in 2023, employers of domestic employees (e.g. nannies) are permitted to provide retirement benefits for such employees under a SEP.

Deduction for qualified conservation contributions

Beginning in 2023, the SECURE 2.0 Act disallows a charitable deduction for an otherwise qualified conservation contribution made by a partnership, S corporation or other pass‐through entity, if the amount of the contribution exceeds 2.5 times the sum of each partner/member's relevant basis in the contributing entity. Exceptions to this apply where substantially all of the contributing entity is owned by members of a family, or where the contribution relates to the preservation of a certified historic structure.