SECURE Act 2.0’s Hidden Gems

The SECURE Act 2.0 was passed into law last December. If you recall, the original SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed in 2019, but it needed some changes and add-on’s. The general idea of the SECURE Acts was to get people saving more for their retirement since the days of pensions are fading in the rear-view mirror. Also, some of the provisions change the timing of tax revenue to the government.

Among the many things provided in the new law are:
• The age to start taking required minimum distributions from your defined contribution plans increases to age 73 in 2023 and 75 in 2033. It was 70.5 previously.

• The penalty for not taking your RMD (or not taking enough) is reduced from a 50% penalty down to 25%, and only 10% if you correct the error in time.

• Starting in 2024, minimum distributions are not required from Roth accounts in employer plans (yes, until now you were required to start taking at a certain age – which is why most people rolled their Roth 401(k)’s to a Roth IRA where no required distributions exist).

• Defined contribution retirement plans will be able to add emergency savings accounts to them.

But one of the most interesting, and maybe controversial, provisions is the change in the catch-up contributions that employees are allowed to make to their employer plans. Currently, employees that are age 50 or more can make an additional up to $7,500 per year catch up contribution to their plan. This is to allow late saver/starters to get more assets into their plan account. This catch up could be made in pre-tax dollars or to a Roth account if the employer had it available.

Starting next year (2024) that catch up contribution can only be made to a Roth account – not a pre-tax account – if the employee makes $145,000 per year or more. This will reduce the amount of tax deferral that older workers can do currently. Adding more to a Roth now instead of pre-tax will increase tax revenue for the government currently and reduce revenue down the road.

There are a host of questions, of course, surrounding this provision. What about a worker who starts mid-year? What about workers with variable pay? Is that $145,000 straight wages only or does it apply to bonuses or commissions?

We do expect guidance to come out on all these provisions as people will always find a different interpretation of these rules. If you are in a position to make catch-up contributions and need some clarification, it would be best to start with your benefits department and/or your CPA to see how this will apply.

This is not considered tax advice. Please consult your tax professional. The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

About The Author

As Vice President and Senior Wealth Advisor, Greg provides financial analysis to high net worth individuals. He is the author of several articles for various publications and nonprofit organizations on estate and financial planning subjects.