By Dr. James M. Dahle, WCI Founder
President Biden signed into law an omnibus bill called the Secure Act 2.0 just before Christmas. Like most bills during the last few years, the $1.7 trillion spending package was passed mostly along party lines as Speaker Nancy Pelosi's last act before Republicans take control of the House of Representatives in 2023. Yes, $1.7 trillion is a lot of money, and the bill included all kinds of things like:
- $45 billion in aid for Ukraine
- $40 billion to respond to natural disasters
- $773 billion for domestic programs
- $858 billion for defense
- Overhaul of the 1887 Electoral Count Act (a response to the events of January 6)
- Protection for senators and former Speakers provided
- TikTok has been banned on government devices
- COVID-related Medicaid expansion goes away April 1 instead of in July
- Telehealth expansion extended through 2024
- Maine lobster industry reprieve (fishermen can still use the equipment that is killing whales)
- Makeup regulatory revamp
- Military academy graduates can no longer get a waiver to play professional sports without two years of service first
- National Labor Relations Board gets additional funding
- Secure Act 2.0
In this article, we're only going to be talking about the last of those items, including significant changes to conservation easement deductions to prevent abuse.
What Is Secure Act 2.0?
If you'll recall, the original Secure Act was passed at the end of 2019. It raised the Retired Minimum Distributions (RMD) age to 72, limited Stretch IRAs to just 10 years, allowed you to pay off $10,000 of your student loans with a 529 plan, and mostly encouraged employers to provide better 401(k)s. Secure Act 2.0 provides additional changes, almost all of which are great for savers, investors, employees, and employers. Let's go over them. If you want more detail, check out this 19-page summary from the chairman of the Senate Finance Committee. I'm going to follow his format but in a lot fewer than 19 pages.
There are so many changes here that this post is thousands of words long. To make your job easier, I have put a big blue delta (Δ) next to the changes that I think every white coat investor should be aware of. There are 90 sections in this act, and I think you need to know about 32 of them. Sorry that it's so long and there are so many changes. I don't make the rules; I just tell you about them and help you interpret them. If you find a mistake I've made, please kindly point it out in the comments section or by email, and I'll get it fixed.
More information here:
Inflation Reduction Act — How Will It Affect White Coat Investors?
Title I: Retirement Savings
The first 28 sections of the Secure Act 2.0 are all about expanding coverage and increasing retirement savings. They involve all kinds of retirement plan rule changes.
ΔSection 101: Expanding 401(k)/403(b) Automatic Enrollment
All new 401(k)s must automatically enroll participants to contribute at least 3% and not more than 10% and automatically increase contributions 1% per year to 10%-15%. Participants can still opt out. Starts in 2025.
Sections 102 and 111: Increased Credit for Small Businesses Starting a 401(k)
The old credit was for 50% of startup costs. Now, it is 100% of startup costs for businesses with up to 50 employees (phases out from 50-100 employees). The credit is for amounts contributed for employees up to $1,000 per employee and phases down over the first four years of the newly instituted plan. It is also available for new employers joining a Multiple Employer Plan (MEP) for the first three years of the MEP. Starts in 2023.
ΔSections 103 and 104: Changed Saver's Credit to Saver's Match
The Saver's Credit, for low earners contributing to retirement accounts, is no longer a deduction but a federally funded match into the account. It can be as much as a 50% match on the first $2,000 contributed (so, $1,000 total) and phases out between $20,500-$35,500 ($41,000-$71,000 MFJ). This is one more reason for residents—at least married residents—to contribute to their Roth IRAs. The match has to be repaid to the Treasury if you pull the money out before retirement. Starts in 2027.
Section 105: Pooled Plan Fiduciary
A pooled retirement plan may name a fiduciary that is not the employer starting in 2023.
Section 106: Addition of Multiple Employer Plans for 403(b)s
The original Secure Act allowed small businesses to band together to pool expenses for 401(k)s in “multiple employer plans.” Now, 403(b)s can do it too, starting in 2023.
ΔSection 107: RMD Age Goes Up
Starting in 2023, you will have to start taking RMDs from your traditional IRAs, traditional 401(k)/403(b)s, and Roth 401(k)/403(b)s at age 73. Starting in 2033, the age will increase to 75.
ΔSection 108: IRA Catch-Up Contributions Indexed to Inflation
Instead of just being a flat $1,000 extra, the additional amount those 50+ can contribute to an IRA each year will be indexed to inflation. Starts in 2024.
ΔSection 109: Higher Catch-Up Contributions in Your Early 60s
For those who are 60-63 years old, 401(k) catch-up contributions will not just be the $6,500 that those 50+ can make. It will be the greater of $10,000 or 50% more than the current catch-up contribution. Right now, that's $10,000 ($6,500 * 150% = $9,750), but since this is indexed to inflation, it could eventually be more. This also applies to SIMPLE IRAs (where the catch-up right now is only $3,000, not $6,500). Starts in 2025.
ΔSection 110: Allows Employers to Match Student Loan Payments into 401(k)s
No longer do you have to miss out on the employer match if you choose to pay off your student loans instead of making 401(k) contributions. This also applies to 403(b)s, SIMPLE IRAs, and even governmental 457(b)s. However, this is up to the employer; it's not a requirement. Employers are just allowed to provide these matches. There will be a new nondiscrimination test just for those employees receiving these matching payments to ensure the benefits do not all go to owners/highly compensated employees. Starts in 2024.
ΔSection 112: Small Employers Get Tax Credit for Making Military Spouses Immediately Eligible for DC Plans
To get this new credit of up to $500 ($200 a piece, plus up to $300 matching contributions) per military spouse employee, an employer must make military spouses eligible to use the 401(k) within two months of hire, make them eligible for any match they would have qualified for after two years, and make them immediately vested in the match. The credit applies for up to three years but does not apply to highly compensated employees. Starts in 2023.
Section 113: Employers Can Now Bribe Employees to Save for Retirement
You can now give employees a $10 McDonald's gift card (or similar) to bribe them to start saving for their own retirement in the 401(k) plan. This apparently wasn't allowed before. Starts in 2023.
Section 114: ESOP Plan Benefit Extended to S Corps
A tax deferral benefit previously available to non-publicly traded C Corps that started Employee Stock Option Programs is now extended to S Corps, for up to 10% of their stock. Starts in 2028.
ΔSection 115: Emergency 401(k) and IRA Withdrawals Now Allowed Without Penalty
Unforeseeable or immediate financial needs relating to personal or family emergency expenses of up to $1,000 may now be withdrawn from a retirement plan without paying the 10% penalty (but still paying tax on tax-deferred money) up to once a year. You may also repay the $1,000 back into the plan (and presumably get a tax deduction for doing so) for three years. If you do repay it, you can do it again next year. If you do not repay it, you have to wait three years before taking another one. This one isn't going to do much for readers of this blog, but it should encourage low earners to save more for retirement without worrying about needing that money to replace the washing machine. Starts in 2024.
ΔSection 116: Allow Employers to Put More into SIMPLE IRAs
Raises the possible match in a SIMPLE IRA from 2% of compensation (or 3% of compensation if a match) to 10% of compensation or $5,000 indexed to inflation, whichever is less. Starts in 2024.
ΔSection 117: SIMPLE IRA and 401(k) Contribution Limit Increases
SIMPLE IRA/SIMPLE 401(k) contribution limits go up by 10% (including catch-up contributions). If the employer has 26+ employees, the employer must provide a non-matching contribution of at least 3% of compensation or a matching contribution of 4% of compensation in order for the plan to qualify for that increase. Starts in 2024.
ΔSection 118: Employers Can Provide a SEP for Nannies
Domestic employees can now be provided a SEP IRA by their employers. Starts in 2023.
Section 119: Rural Electric Employees Can Get Higher Employer Contributions
Non-highly compensated employees of a rural electric company now have a 415(c) contribution limit that is only limited by the 415(c) limit of $245,000, not by their compensation. So even if they only made $90,000, a worker could still potentially get $66,000 into their 401(k). Interesting loophole there. Starts in 2022.
Section 120: Low Dollar 401(k) Portability Changes
Retirement plan providers can automatically move a tiny old 401(k) into an employee's new 401(k) without their consent. Starts on December 24, 2023.
ΔSection 121: Introduction of Starter 401(k) Plans
A starter 401(k) (or safe-harbor 403(b)) can be started by an employer that does not currently offer a retirement plan, has a contribution limit equal to the IRA contribution limits ($6,500 in 2023 with $1,000 catch-up limits), and default-enrolls employees with a 3%-15% of compensation elective contribution. Starts in 2024. Not sure why an employer would choose a starter 401(k) over a real one, but perhaps it would be less hassle or less costly. This does not seem to replace the IRA contribution limit; it is just equal to it. Starts in 2024.
Section 122: Treasury Will Help States Find Savings Bond Owners
The Treasury will now share information with states about those who own matured savings bonds in their state so the state can help locate the owners. Starts in 2022.
Section 123: Slight Changes to ESOP Rules
Some securities that were not previously considered publicly traded for ESOP rule purposes now will be. Starts in 2028.
ΔSection 124: ABLE Disability Age Increased
The old rule was that the person had to be disabled before age 26 to have an ABLE account established for them. Now it is 46. Starts in 2026.
ΔSection 125: Part-Time Employees Now Eligible for 401(k) After 2 Years
Employees become eligible to use a 401(k)/403(b) after no more than one year of full-time work (1,000+ hours) or two years of part-time work (500+ hours per year). It was three years for part-timers. Starts in 2025.
ΔSection 126: 529 to Roth IRA Rollovers Now Allowed
Once the 529 has been established for 15 years, 529 beneficiaries can roll up to $35,000 from their 529s into their Roth IRAs. This is not an addition to their annual contribution but a replacement for it. Basically, if you oversave for college, newly graduated students can use their $6,000ish per year for something besides Roth IRA contributions and still get their Roth IRA funded. This won't work for Backdoor Roth IRA contributions. This won't change what I do with leftover 529 money for most of my kids (that will go to the grandkids), but it will for leftover 529 money I have saved for nieces and nephews. Starts in 2024.
ΔSection 127: Pension-Linked Emergency Savings Accounts
Employers can establish new tax-free accounts for their non-highly compensated employees called pension-linked emergency savings accounts. Employers can automatically opt employees in with up to 3% of their compensation. The first $2,500 put into this account by the employee sits there as an emergency fund. Once it hits $2,500, additional contributions go into the employee's Roth 401(k). Employers can match the contributions 1:1 up to $2,500. The first four withdrawals from the account each year are penalty-free. At separation, the money can be taken as cash (penalty-free), rolled into a Roth IRA, or moved into the Roth 401(k). Starts in 2024.
Section 128: 403(b)s Can Now Use Collective Investment Trusts
Collective Investment Trusts (CITs) are currently used in 401(a)s, but 403(b)s are limited to annuities and mutual funds. Now, 403(b)s can also use CITs. Starts in 2022.
Title II: Annuities and Retirement Income
Title II is much smaller than Title I, but it includes four sections that make changes with annuities. I worry that a lot of the changes in these sections will cause complex, expensive annuities to be sold more frequently than they were before. This is a huge boon to annuity salespeople, as it now provides them with a whole new pool of money that can be used to purchase their products that are designed to be sold, not bought. I worry also that it will open up employers who allow bad annuities into their retirement plans to more employee lawsuits for inappropriate 401(k) investments (due to their fiduciary duty).
ΔSection 201: Makes It Easier to Put Annuities into Retirement Plans
Eliminates an actuarial test that commonly keeps certain types of more complex annuities (return of premium, period certain, annual increases) out of retirement plans. I'm not so sure this one is a good thing for retirement savers, but it starts in 2022.
Section 202: Makes It Easier to Put QLACs into Retirement Plans
Qualified Longevity Annuity Contracts (QLACs) are deferred income annuities that were hard to put into retirement plans because of RMD rules. These rules have now been relaxed so up to $200,000 can go into a QLAC. QLACs with spousal survival rights can also now be put into retirement plans. Again, I'm not sure this is a good thing given how annuities are typically sold. Starts in 2022.
Section 203: Insurance Dedicated ETFs
Variable annuities could now use ETFs like they currently use traditional mutual funds. Starts at the end of 2029.
Section 204: Slight Change to RMD Rules for Individual Retirement Annuities
Now “extra” income from the annuity can be used to reduce how much of an RMD you must take from the non-annuity portion of a retirement account. Starts in 2022.
Title III: Retirement Plan Rule Changes
There are 50 sections in this title. Some don't matter much, but others may have a significant effect on your financial life.
Section 301: Provides Flexibility and Protections When Retirement Plan Overpayment Errors Occur
Plan administrators no longer have to recoup mistaken payments, and those who received them get additional protections, including protecting rollovers of those overpayments. Starts in 2022.
ΔSection 302: RMD Penalty Cut in Half
The RMD penalty (50% of what should have been withdrawn but wasn't) is one of the most onerous in the tax code. It was just reduced to 25%, starting in 2023.
Section 303: Creates a Retirement Account Lost and Found
Creates a national searchable lost and found online database for forgotten retirement accounts. Starts at the end of 2024.
Section 304: Increases Dollar Limit for Small 401(k) to IRA Distribution
Employers can just cash out three-figure 401(k)s and can roll 401(k)s between $1,000-$5,000 to an IRA when their employees separate. Above $5,000, the employee must consent to taking the money out of the 401(k). Now, the limit is $7,000 instead of $5,000. Starts in 2024.
Section 305: Allows for Easier Retirement Plan Error Correction
It is now easier to correct many retirement plan contribution and distribution errors without involving the IRS by amending tax returns. This is known as the Employee Plans Compliance Resolution System. Starts in 2022.
Section 306: Eliminates “First Day of Month” 457 Rule
457s (and only 457s) had a dumb rule that required you to change your contribution rate before the first day of the month, even if the money for the contribution wasn't available until later in the month. That rule is now gone. Starts in 2023.
ΔSection 307: QCD Improvements
The best way for older retirees to give to charity just got better. Qualified Charitable Distribution (QCD) annual limits ($100,000) are now indexed to inflation. Plus, you can make a one-time $50,000 charitable distribution, via a charitable trust or charitable annuity (split interest gifts). Starts in 2023.
Section 308: Age 50 Rule Now Applies to Private Firefighters
Did you know that firefighters get a special loophole to the Age 55 rule (no penalty for 401(k) withdrawals after separation from service)? It's the Age 50 rule for them. However, that used to just apply to publicly employed firefighters. Now it applies to all of them. Starts in 2023.
Section 309: Tax-Free Disability Payments for Retired First Responders
Disability payments for retired first responders become tax-free. Starts in 2027.
Section 310: Change in Retirement Plan Nondiscrimination Testing for Employees Under 21
Nondiscrimination tests become more lenient for employers to encourage them to allow those under 21 to use their retirement plans. Starts in 2024.
Section 311: Shortens the Time Period to Repay a Birth/Adoption IRA Distribution
The original Secure Act allowed for an indefinite time period, even though you can only refile your taxes to get it for three years. This clarifies that you must repay the distribution within three years. Starts in 2022 (but can be used retroactively for three years).
Section 312: Employees Can Self-Certify Hardship for Retirement Plan Withdrawal Purposes
This is really just an administrative clarification. Starts in 2023.
Section 313: Establishes Statute of Limitations for Bad Contributions/Withdrawals
The old statute of limitations (three years in the case of bad withdrawals; six years for bad contributions) started when the taxpayer filed the form (Form 5329) stating they had done something bad. Now it starts three years/six years from the date of the original return, even if the taxpayer didn't realize they should have filed the excise tax form with the return. Starts in 2022.
ΔSection 314: Domestic Abuse Penalty-Free Withdrawal
This adds yet another exception to the Age 59 1/2 rule: domestic abuse. The limit is $10,000 or 50% of the balance, whichever is less. Also applies to 401(k) withdrawals. The money can also be repaid (with a refund of taxes paid) for a period of three years. Starts in 2024.
Section 315: Equalizes Aggregation Rules for Those in Community Property States
Retirement plans in businesses owned by spouses (and sometimes parents and children) must be aggregated for purposes of nondiscrimination testing. However, in a community property state, these businesses were penalized in a way that didn't apply to separate property states. This fixes that issue. There was also an issue where parents and minor children owned aggregated businesses that has also been addressed. Starts in 2024.
Section 316: Beneficial Plan Amendments Now Allowed Until Tax Return Due Date
Employers can now add provisions to their retirement plans that benefit employees until the tax return due date rather than the end of the calendar year. Starts in 2024.
ΔSection 317: Solo 401(k)s Started After the Calendar Year Can Now Get Employee Contributions
I used to recommend that you use a SEP IRA if you don't get your solo 401(k) established by the end of the year. Now, you can just establish your 401(k) before your tax return date and still make employee contributions to it. No reason now to use the SEP IRA and mess up your Backdoor Roth IRA pro-rata calculation. Starts in 2023 (for 2023 contributions, not 2022 contributions.)
Section 318: Lifecycle Funds Can Be Compared to Lifecycle Benchmarks
There was a dumb rule that you had to compare Lifecycle funds to a broad market index, even though the funds included bonds and other assets. Disclosure statements will now allow a more appropriate comparison. Starts in 2025.
Section 319: Government Agencies to Review Reporting and Disclosure Requirements
The Treasury, Department of Labor, and Pension Guarantee Benefit Corporation will review reporting and disclosure requirements and report to Congress within three years. Oversight and review are good things.
Section 320: Eliminating Junk Mail for Unenrolled Employees
Employers will no longer be required to send a bunch of 401(k) paperwork to employees who haven't even enrolled in the 401(k). Starts in 2023.
Section 321: DOL to Review Some Paperwork
The Department of Labor is supposed to review the current interpretive bulletin about pension risk transfers and report to Congress within one year.
Section 322: Clarification of Penalty for Prohibited IRA Transaction
If you do a prohibited IRA transaction (like buying an investment not allowed in an IRA), the entire IRA is treated by the IRS as though you withdrew the entire balance even if the transaction was only a tiny fraction of the IRA. This clarifies that only that particular IRA is treated as distributed. So, if you're going to do something in a gray area, roll the money you're going to do it with into its own IRA. Starts in 2023.
Section 323: SEPP Rule Clarification
The Substantially Equal Periodic Payments (SEPP) exception to the 10% early withdrawal penalty will now be applied even if a rollover or annuity exchange occurs or if the IRA is invested into any annuity that meets the RMD rules. The rollover changes start in 2024, and the annuity changes start in 2023.
ΔSection 324: Rollover Paperwork Standardization
The Treasury is to provide simplified and standardized rollover forms by 2025.
ΔSection 325: No More Roth 401(k) RMDs
Roth 401(k)s (but not Roth IRAs) have Required Minimum Distributions (RMD). Starting in 2024, they won't.
ΔSection 326: Terminal Illness Exception to 10% Early Withdrawal Penalty
Another new exception to the 10% Early Withdrawal Penalty (Age 59 1/2 rule) will be terminal illness starting in 2022.
Section 327: Surviving Spouse Can Elect to Be Treated as Employee for RMDs
The surviving spouse can now elect to be treated as the employee with respect to RMDs. This could reduce the RMD amount. Starts in 2024.
Section 328: Administrative Change to a Public Safety Officer Loophole
Cops can pay up to $3,000 of health insurance premiums from their retirement account without it being taxable income. It no longer has to be paid directly.
Section 329: Another Public Safety Officer Loophole Change
Like firefighters, cops can start taking money out of retirement plans penalty-free at age 50. Now, they can start after 25 years of service, even if they're not 50 yet.
Section 330: Corrections Officers Loophole
Corrections officers will now also be treated as public safety officers with respect to this Age 50/25 years of service rule.
ΔSection 331: Disaster Retirement Plan Withdrawal Rule Changes
You can withdraw up to $22,000 from retirement plans penalty-free in the event of a federal disaster. Taxes on that withdrawal can be spread over three years. The money can also be repaid into a retirement account. You can also repay any money you withdrew for a home purchase. Employers can allow a larger amount to be borrowed for a longer period of time from their retirement accounts in a disaster, too. This change is retroactive to January 26, 2021. I'm not sure what disaster happened that day.
Section 332: Employers Allowed to Replace SIMPLE IRA with a 401(k) During the Year
They used to have to wait until the end of the year to swap out a SIMPLE IRA. Under new rules, you can do it mid-year as long as the 401(k) has mandatory employer contributions. Starts for the 2024 plan year.
Section 333: Corrective Distributions of Excess IRA Contributions No Longer Subject to Penalty
Another exception to the 10% early withdrawal penalty will now be corrective distributions of excess contributions and the earnings on those. Starts in 2022.
ΔSection 334: Long Term Care Premium Exception to 10% Early Withdrawal Penalty
You can use up to $2,500 per year to pay long-term care premiums without paying the 10% early withdrawal penalty. Starts in 2026.
Section 335: Correction of Pension Plan Mortality Tables
Only actuaries are going to care about this one. It caps a figure they use in plan design to 0.78%. I think the change will slightly improve pension payments for participants. Starts in 2022.
Section 336: Paperwork Requirement for GAO
The General Accountability Office is supposed to report to Congress within 18 months on the effectiveness of the 402(f) distribution notice given to plan participants who take distributions.
ΔSection 337: Special Needs Trusts Can Have a Charity as the Remainder Beneficiary
Special needs trusts have special RMD rules (the ones that apply to the disabled person who is the beneficiary) but can now list a charity as the remainder beneficiary. Starts in 2023.
Section 338: Paper Benefit Statement Must Be Provided
Unless the participant opts out, an employer plan must send them their annual (every three years for defined benefit plans) benefit statement in paper form. Starts in 2026.
Section 339: Tribal Courts Now Recognized for QDROs
Qualified Domestic Relations Orders (QDROs) split up IRAs in a divorce. Tribal courts have been added to the list of approved courts for these. Starts in 2023.
Section 340: DOL Paperwork Requirement
The Department of Labor must review its fiduciary disclosure requirements within three years.
Section 341: Paperwork Simplification for Employer Plans
Employers can soon combine required notices into one form. Starts in 2025.
Section 342: Financial Options Risk Mitigation Act
Pension plan administrators will be required to provide more information to participants deciding between taking a pension or a lump sum—such as how the lump sum was calculated. Final rule to be issued in a future year.
Section 343: Defined Benefit Plan Annual Funding Notices
Pension plans are going to have to tell their participants how underfunded they are. Starts in 2024.
Section 344: DOL Paperwork Requirement
The Department of Labor will have to do a report on pooled employer plans by 2028 and every five years afterward.
Section 345: Group of Plans Form 5500 Clarification
If a plan files its Form 5500 as a “Group of Plans,” it still only needs an audit if there are more than 100 employees. Starts in 2022.
Section 346: Worker Ownership, Readiness, and Owner (WORK) Act
Sets aside funds to be used to promote employee ownership programs from 2025-2029. The devil will be in the details.
Section 347: Secretary of Labor Paperwork Requirement
The Secretary of Labor will have to submit a report on the effect of inflation on retirement savings within 90 days.
ΔSection 348: Hybrid Cash Balance Plan Adjustment
A technical adjustment to certain types of cash balance plans to prohibit the backloading of benefit accruals. It will allow plan sponsors to provide larger pay credits to older, longer-service employees. Worth talking to your plan provider about if you have a hybrid cash balance plan. Starts in 2023.
Section 349: Termination of Variable Rate Premium Indexing
A technical change to the method for determining unfunded vested benefit amounts. Starts in 2022.
Section 350: Grace Period and Safe Harbor for Employer Screwups
This allows employers to fix honest mistakes without being penalized as long as the employee is made whole and it is done within 9 1/2 months of the mistake.
More information here:
My Favorite Physicians That Became Politicians: The History of Docs in Congress
Titles IV and V
Includes some technical, clerical, and administrative amendments to the original Secure Act and Secure 2.0.
Title VI: Revenue Provisions
I'm really not sure why some important rule changes are in Title I, others are in Title III, and yet others are in Title VI. But we're not done yet.
ΔSection 601: Roth SIMPLE and SEP IRAs
Now you can make Roth contributions to SIMPLE and SEP IRAs. Starts in 2023.
Section 602: 401(k)/403(b) Hardship Withdrawal Rule Standardization
403(b) hardship withdrawals used to have to come from employee contributions only. No longer. Starts in 2024.
ΔSection 603: Rothification of Catch-Up Contributions for High Earners
No longer will catch-up contributions for high earners ($145,000+, indexed to inflation) be allowed to be tax-deferred, They will have to be Roth contributions. This appears to be driven by a need to increase revenue to the government. Starts in 2024.
ΔSection 604: Match Can Now Be Roth, Too
Employers can now allow the match dollars to go into the Roth subaccount of a 401(k), 403(b), or 457(b). This includes matches of payments on student loans. They will be taxable to the employee and immediately vested. Starts in 2022.
ΔSection 605: Limitation on Charitable Conservation Easement Deductions
Can't say we didn't see this one coming. Abusive practices with conservation easements have caused the IRS and, now, Congress to crack down on them. There is now a limit on the deduction of 2.5X of each partner's relevant basis—unless it has been held for at least three years, the partnership is all owned by the same family, or there is a historic structure present on the property. This will eliminate much of the “benefit” of doing these since your tax deduction will now rarely be any larger than the amount you put into the deal. Starts in 2022.
Section 606: Extends Employer Flexibility for Retiree Health Benefits
Employers are allowed to use up to 1.75% of a pension plan that is at least 110% funded for retiree health and life insurance benefits. This flexibility has now been extended to 2032.
More information here:
The Student Loan Holiday Has Been Extended Again (and Maybe Forever)?
Title VII
Tax court judges somehow got their own section. I think doctors need better lobbyists.
Section 701: Tax Court Judges Get TSP Match
Tax court judges weren't getting the TSP match before. Now, they will. They also get parity with every other federal judge with respect to another benefit program for their surviving spouses and dependent children. Starts in 2022.
Section 702: Tax Court Special Trial Judges Get a Retirement Plan
Special trial judges of the tax court will now be treated like other federal judges. Why they didn't get the same retirement plan before is beyond me. Starts in 2022.
Well, almost 5,000 words later here we are at the end of the Secure Act 2.0. There is a TON in there that changes the rules we have been playing by for years. At a minimum, make sure you've gone back and read all of the sections with the blue deltas (Δ) next to them for the most relevant information. I'm really bummed that about half of this website is now out of date. We'll try to update it as we go along.
What do you think of the Secure Act 2.0? What surprised you the most? What changes are you most (or least) excited about? Comment below!
Thank you very much for this summary of changes; I will be revisiting this page many times!
I have a question about the RMD for Roth accounts.
I saw the update to Section 325 above.
“ΔSection 325: No More Roth 401(k) RMDs
Roth 401(k)s (but not Roth IRAs) have Required Minimum Distributions (RMD). Starting in 2024, they won’t.”
I want to confirm that now neither the Roth 401k nor the Roth IRA have an RMD?
Will this change anything about the recommendations for the prioritization of their use in estate planning vice retirement income?
Thank you!
Right now (until 2024), Roth 401(k)s have RMDs. Starting in 2024, they won’t.
Not really a big change though. Most with Roth 401(k)s were just rolling them into Roth IRAs at retirement and will probably still continue to do so.
Does the same apply to ALL employer based Roth plans (e.g. Roth 403b or other?)
Yes, I believe so.
Thank you
Thanks a lot for a comprehensive easy to read summary.
Section 126: 529 to Roth IRA Rollovers Now Allowed
“This won’t work for Backdoor Roth IRA contributions.”
Does this mean the beneficiary cannot do backdoor Roth IRA , the extra ~6500 ? So, you can do the 35k transfer into Roth and that is it.
No, they could do a Backdoor Roth IRA, but not using 529 money because that can only go directly to Roth and I think there will still be an income limit on that.
It looks like there are no income limits for the 529 to Roth IRA rollover.
Per Forbes article:
“However, the income limitation to be able to contribute to a Roth IRA is removed for the 529 to Roth IRA rollover, but the annual contribution limit remains.”
https://www.forbes.com/sites/jamiehopkins/2022/12/22/the-secure-20-acts-impact-on-roth-iras/amp/
Not sure of Forbes’ primary source.
Beantown John- Great catch on the Forbes article! I’d been looking for info on whether the 529 to Roth IRA would have Roth IRA income limits. Other than the Forbes article, I can’t find any other source that states the income limitation to be able to contribute to a Roth IRA is removed for the 529 to Roth IRA rollover.
Me either. Maybe the author read the bill itself. I didn’t do that. I just read the 19 page summary penned by the chair of the Senate Finance Committee.
The maximum someone can convert to Roth IRA in any given year from 529 plan will be that year’s Roth Contribution limit MINUS that year’s Roth/Traditional IRA contributions (so you can’t effectively double your IRA contributions). Any contributions to 529 plan within the last 5 years are NOT eligible to be converted either.
Where’d you find the last 5 year rule?
I saw it mentioned in this Fool article
https://www.fool.com/retirement/2022/12/28/congress-gave-education-savers-roth-ira-boondoggle/
I wouldn’t take it as gospel yet. I’m sure we’ll know for sure in about year.
I also saw this referenced in a Kitces webinar. You can find it in the legislation linked below starting on page 2161, line 21:
https://www.appropriations.senate.gov/imo/media/doc/JRQ121922.PDF
Great stuff.
question on section 126 – can the 529 -> RIRA still work if the person has no earned income? For example – an early retiree who has leftover 529 money and wants to continue funding their RIRA in their 50s.
Not sure that rule has been worked out.
If so, might be a good idea to just leave the money sitting in the 529 for an eventual year when you don’t have earned income.
SZ- was thinking the same thing. Even if Roth IRA income limits are not suspended for the 529 to Roth IRA rollover, one could still strategize to drop retirement income to slip in under Roth IRA income limits.
Earned Income rules still apply. So you can’t load up on 529 Plan contributions up to $35k (naming yourself as beneficiary) and then converting to your own Roth IRA after holding it for 15 years when you’re in retirement. That would be way too easy.
Again, where did you get that info? Not seeing it in the summary piece and suspicious that it was even in the original bill and will have to wait for clarification from the IRS.
Wait, the Feds increased our catch-up contribution limits to our 401k and 403b when we’re 60-63, but they’re making these contributions an after-tax Roth for us high earners? How’s that going to look? Will the employers be setting up separate Roth accounts for high earners?
I think every 401(k) will be forced to have a Roth account whereas now it’s only an option.
Thanks for this excellent and comprehensive overview of the new SECURE 2.0 Act. I hope that financial bloggers will provide further specific information on how act this will change the TSP, especially for military service members.
I’d expect everything that applies to 401(k)s to apply to the TSP.
I would disagree with your generalized and outdated statements on annuities. The legislation actually lowers the cost of annuities by allowing insurance companies to put ETFs, rather than mutual funds, into the annuities and builds in the ability for investors to create a pension by allowing guaranteed income into 401Ks. It also does not absolve plan providers from their duty to vet the plan investment choice. So plan administrators still have to vet the insurance carrier before putting it into the plan. Last, it still puts the choice into the participants hands to decide if they want to incorporate an annuity into their allocation. “Annuity salespeople” can’t contact individual participants so the “how annuities are sold” isn’t applicable.
I see the possibility for goodness there. I’m just worried about what will actually occur.
Annuities can be sold to plan administrators just as easily as individuals and with similar untoward consequences.
Most annuities are garbage, opaque, high-fee products. The good ones can be a useful way to spend money in retirement, but are rarely useful to actually acquire it during the accumulation phase. You’re also paying twice for the tax protected growth feature by putting a tax protected option into a tax protected option. I think we’re probably better off without annuities in employer provided retirement accounts. Those who want an individual retirement annuity such as a SPIA can buy it once they retire and roll money into an IRA.
A lot of inaccuracies stated in that response. There’s no such thing as a good or bad annuity. It’s a highly regulated financial product like others in the market place and its misuse depends, much like other financial instruments, on the person who puts a client in it. It would surpise you that most SEC compliants were about stocks, mutual funds, ETFs, and options. You’re also not paying twice for tax deferral. An annuity in plan would be offering a guarantee and, per the Secure Act 1.0, would be portable. Your pay for the guarantee. An annuity option in a DC plan would not be the same as an individual retail option. Perhaps you may want to research a bit more on annuity innovation. It’s concerning when misinformation and bias is written as educational material.
Do you sell annuities? I’m guessing you do.
I agree its misuse is mostly the fault of those who sell them.
Q. Do annuities outside of a retirement account offer tax deferral?
A. Yes they do. That feature costs something, the insurance costs of the annuity.
Q. Do retirement accounts offer tax deferral?
A. Yes they do. That feature usually costs some fees and at least some loss of flexibility.
Thus, when you put an annuity in a retirement account, you are paying those annuity costs, some of which go to pay for that tax-deferred growth that you have already “paid for” by using the retirement account already.
It’s concerning when those who sell annuities don’t understand how they work.
[Comment withheld]
I noticed you dodged the question. When you’re ready to answer it, you may continue to comment here.
More discussion here:
https://forum.whitecoatinvestor.com/general-welcome/370645-discuss-latest-wci-blog-post-secure-act-2-0-%E2%80%94-what-doctors-need-to-know
https://forum.whitecoatinvestor.com/retirement-accounts/370231-secure-2-0-is-out
https://forum.whitecoatinvestor.com/the-lounge/326965-secure-2-0-passes-the-house
Can you speak to the non-highly compensated insividuals for the emergency savings ($2500)? Who is “highly compensated” and what is the income limit? Will high earners be able to contribute to this? Thanks for the post!
Section 127: Pension-Linked Emergency Savings Accounts
Will you be doing this?
Also is everyone going to flip their contributions to ROTH since employers can match that way? Why would you not get matches via ROTH method?
I believe this would reduce the dollar amount received and be reported as taxable income in the year that you receive the match. So if you would have received $10k as a pre-tax match for the year but decide to elect Roth (and assuming your marginal tax rate is 32%) then you’d actually see $6800 in matching contributions to your Roth 401k account and have an additional $10k reported on the W2 from your employer.
I don’t think that’s true. I think if you choose to receive $10K as a Roth match, you’ll get $10K in the Roth and an additional $10K on the W-2. But I guess we’ll see.
There are plenty of people for whom tax-deferred contributions will still make sense (i.e. people in peak earnings years).
Highly compensated individuals are defined for 2023 as those making $150K+.
https://tax.thomsonreuters.com/blog/irs-announces-2023-retirement-plan-dollar-limits-and-thresholds/
Not sure if WCI will have the new fancy pension-linked emergency savings accounts. Some of our employees could qualify for them. We’ll reevaluate our 401(k) to see what changes need to be made as we move into 2023 and 2024.
Front loading a child’s 529 at birth from both parents seems prescient in retrospect. It allows for $10,000/yr private high school tuition and unlimited college/ grad school tuition/expenses. With Section 126 it looks like it can fund a child’s Roth IRA for 6+ years (as early as age 15), with either no earned income or income limits. The grandchildren will receive whatever remains for education needs or Roth IRA(as early as age 15) . A lot of options are available for this tax favorable vehicle. Needs a catchy name. Maybe the “529 Stretch IRA”?
Yea I’m sure I’ll be writing a post about it as the details become more clear. You’re basically just prefunding Roth IRAs. Like the 529 itself, a tax break for rich families.
The 529 can be used ($10,00 per year) for grades PK-12, not just high school.
I believe this would reduce the dollar amount received and be reported as taxable income in the year that you receive the match. So if you would have received $10k as a pre-tax match for the year but decide to elect Roth (and assuming your marginal tax rate is 32%) then you’d actually see $6800 in matching contributions to your Roth account and have an additional $10k reported on the W2 from your employer.
I am unclear regarding rolling the 529 into a Roth IRA… Is this for the beneficiary or can it also be the owner? If it only the beneficiary, worth converting some of my kids’ residual 529 to me as beneficiary. I assume I need to let the clock tick for 15 years before I can do this transfer?
I believe just the beneficiary. And yes the account will need to have been established for 15 years. Not sure if changing beneficiary will restart that clock or not though.
For solo 401k plans, can the employer contribution now be classified as a Roth contribution?
That’s my interpretation.
That will be great if that’s the case. We’ll see if E*Trade gets their site updated in time for me to make my 2022 employer contribution a Roth contribution.
Does this mean that an individual 401k can somehow make Roth contributions over the 6500 backdoor Roth for the year? Thanks.
401(k) and IRA contribution limits are completely separate, and that goes for their Roth versions too. My wife and I put $66K each into our 401(k) already this year, all in Roth. Hers was $22.5K Roth employee contribution plus $43.5K Mega Backdoor Roth. Mine was all Mega Backdoor Roth .
Thank you! For over savers in 529 plans the idea of rolling it over to a Roth at 15 years old is awesome!
Clarification: While the income limitation to be able to contribute to a Roth IRA has been removed for the 529 to Roth IRA rollover, the annual contribution limit and probably the requirement that a Roth IRA owner have includible compensation at least equal to the amount of the rollover remains. It looks like the 15 year old may need to generate compensation. Looking forward to WCIs take on all of this in a future post.
You seem to have more info on it than I do, but the rules will become more clear with time.
Thank you very much for your summary Security Act 2.
I have my question and clarify my RMDs:
I was born 7/1950. It means I am now 72. Without passing Sec Act 2, I have to withdraw my tax deferred up to 4/2023. With Sec Act 2, I will withdraw my deferred accounts like Traditional IRAs, 401k, . up to 4/1/2024, the last day? Is it correct?
Thank you for your time. Best wishes for new year.
Thomas
No. The RMD age of 73 goes into effect in 2023. You turned 72 in 2022, therefore you are under the old rules and will have to take your RMD’s this year.
I agree. He better take an RMD.
Such a timely and comprehensive synopsis, thank you!
For those with additional questions or who want to go into the weeds, this article on the Kitces site may be helpful for those willing to take on the daunting task of reading through it. I found it very informative.
At the bottom is a useful time map of when these various changes go into effect.
https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/
Well I’m proud to have beat Jeff by two days on this one. He’s usually all over this stuff ASAP but apparently wanted to enjoy Christmas!
Thanks for the summary! Question on Section 126: 529 to Roth IRA Rollovers Now Allowed:
It seems like it doesn’t increase the amount that we can contribute to a Roth IRA over the annual contribution limits, but I’m wondering if there’s a worthwhile benefit of funding a 529 plan now (even if we’re not expecting to use it for future education) and letting it sit for 15 years. I would get a New York State income tax deduction now and 15+ years of potential gains, and then could use those funds up to $35,000 to fund a Roth IRA at that point (rather than finding via the backdoor Roth for a few years)
I wouldn’t rush. More details on these rollovers will come out in the next year. If there still seems to be some kind of Backdoor 529/Roth IRA move that’s worthwhile, you can do it then.
The intent of this law is to encourage people to save for college without worrying about the kid maybe not going to college, not give them another retirement account.
But your strategy may very well turn out to be doable. Whether $35K in a Roth IRA instead of a taxable account for 15 years is worth the hassle to you is up to you. You’re really just prefunding your Roth IRA doing this. I figure that extra tax free growth could be worth something like $10-20K after 15 years. So yes, it could absolutely be worth doing. But I don’t think I’d start the account tomorrow if I were you. I’d let this all shake out for a few months until the IRS publishes a bit more guidance on it.
Thank you so much for the post, lots of information concisely summarized for us!
Could the qualified disaster relief provision be used to roll over funds ($22k per month year with federally qualified disaster starting in 2021) from 401k/403b -> IRA (or Roth IRA if withdrawing from Roth employer plans) a là CARES act? May be useful for some people and worth a post when details are available.
Not sure if it can be “paid back” into an IRA instead of the 401(k) it came from.
Section 346: Worker Ownership, Readiness, and Owner (WORK) Act
Sets aside funds to be used to promote employee ownership programs from 2025-2029. The devil will be in the details.
should be:
Section 346: Worker Ownership, Readiness, and KNOWLEDGE (WORK) Act
Sets aside funds to be used to promote employee ownership programs from 2025-2029. The devil will be in the details.
You’re right. Thanks for the correction.
#204 – Are they referring to QLACs ? Does income from a QLAC count towards your RMD?
Yes. If you buy it in an IRA.
I had heard that NQ annuity gains could be withdrawn for Long Term Care without paying income taxes.
I see where you mentioned that the limited amount of $2,500 could be withdrawn without an early withdrawal penalty for LTÇ, but you did not mention the other item. Is my statement correct?
As I understand it, you were able to exchange into a LTC policy from an annuity even before this act. I don’t think that was addressed at all in the act but it’s possible I missed something.
Question about this part…
“Section 301: Provides Flexibility and Protections When Retirement Plan Overpayment Errors Occur
Plan administrators no longer have to recoup mistaken payments, and those who received them get additional protections, including protecting rollovers of those overpayments. Starts in 2022.”
I don’t suppose this means someone with a Solo 401k could intentionally overpay their employer contribution and then not have to take it back? 😉
I accidentally put too much in employer contributions into my solo401k this year, and will have to fix that. I already max out my W2 retirement accounts, and have solo401k for side gig (telemedicine).
Thank you for the great summary of the Secure Act! I’m sure there will be many impacts yet to be determined.
Nope. Nice try. Better plan to fix that overcontribution.
I believe your comment in the summary is incorrect :
“Military academy graduates can now get a waiver to play professional sports without two years of service first”
https://www.congress.gov/bill/117th-congress/house-bill/7900/text
• SEC. 553. AGREEMENT BY A CADET OR MIDSHIPMAN TO PLAY PROFESSIONAL SPORT
• CONSTITUTES A BREACH OF SERVICE OBLIGATION.
•
• (a) United States Military Academy.–Section 7448 of title 10,
• United States Code, is amended as follows:
• (1) Paragraph (5) of subsection (a) is amended to read as
• follows:
• “(5) The cadet may not obtain employment, including as a
• professional athlete, until after completing the cadet’s
• commissioned service obligation.”.
https://finance.yahoo.com/news/bill-block-academy-grads-playing-164642024.html
I must have got it backwards.