Secure Act 2.0 Inherited IRA: A Summary of Improvements to Retirement Planning in America

Secure Act 2.0 Inherited IRA: A Summary of Improvements to Retirement Planning in America

Retirement should be a time for people to celebrate life and enjoy the fruits of their labor, with as little anxiety about finances as possible. Unfortunately, a November 2021 survey by the Insured Retirement Institute revealed that workers between the ages of 40 and 73 have insufficient retirement savings to cover their income needs, and they are not saving enough to catch up. In an attempt to address this coming retirement shortfall, Congress recently passed legislation that provides increased tax incentives for employers, encourages more workers to save for retirement, and could significantly reshape and improve retirement outcomes in the coming years for millions of Americans. The SECURE Act 2.0 was signed into law at the end of 2022 by President Biden as part of the $1.7 trillion budget bill for 2023. The legislation has almost one hundred provisions that change many of the rules for existing retirement accounts (including 401(k), 403(b), IRA and Roth). The legislative package builds upon the 2019 SECURE Act.

Due to the number of provisions in the legislation, a complete analysis is not appropriate for this article, but let’s explore several of the more impactful retirement changes in the SECURE Act 2.0 summary below.

RMD Age Changes

The 2019 SECURE Act raised the age at which individuals must begin taking required minimum distributions (RMDs) from traditional IRAs and employer retirement plans from 70½ to 72. As a result of a provision in the SECURE Act 2.0, starting in 2023, the age at which individuals must begin taking RMDs increases from 72 to 73. On Jan. 1, 2033, the age for RMDs will increase to 75. In addition, the penalty for failing to take RMDs by year end is cut in half from 50% of the undistributed amount to 25%. Also, Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024.

Everyone’s tax situation and cash needs are different. For some, it may be more advantageous, or even necessary for retirement funding, to start taking RMDs before the mandatory distribution age of 73 or 75 (IRA account owners can begin taking taxable distributions at age 59½). Others may want to delay taking taxable distributions for as long as possible, which this rule change helps accommodate. A careful tax analysis by a financial professional can help determine the ideal source of cash for retirement needs, while minimizing your tax burden.

Catch-up Contributions to IRAs

Catch-up contributions allow people aged 50 or older to make additional contributions to their traditional or Roth IRA above and beyond the base contribution limit amount (currently $6,500, which is indexed to inflation). Beginning in 2024, the $1,000 catch-up amount for IRA contributions will also be indexed to inflation. These catch-up contribution increases should help people accelerate their savings even more before retirement.    

Catch-up Deferrals to Employer Retirement Plans

Beginning in 2023, the Secure Act 2.0 increases the catch-up deferral limits for employer retirement plans for people aged 50 or older from $6,500 to $7,500. Beginning in 2025, workers between the ages of 60-63 will be able to defer the greater of $10,000 or 50 percent more than the regular catch-up amount. For employees with wages over $145,000, catch-up deferrals will be required to be designated as Roth. After 2025, the increased deferral amounts will be indexed to inflation.

Early Withdrawals from Retirement Accounts

Under current law, the IRS imposes a 10% penalty on premature distributions from retirement accounts such as 401(k) plans and IRAs before the age of 59½, unless an exception applies. Starting in 2024, the SECURE Act 2.0  provides an exception for certain distributions used for emergency expenses (unforeseeable or immediate financial needs relating to personal or family emergency expenses).  Only one distribution is allowed per year of up to $1,000, and an individual has the option of repaying the distribution within 3 years. If the distribution is not repaid in this period, no further emergency distributions are allowed.

401(k) and 403(b) Automatic Enrollment

Studies indicate that automatic enrollment in 401(k) plans has significantly increased employee participation since being approved by the Treasury Department in 1998. Beginning in 2025, the SECURE Act 2.0 requires employers to automatically enroll eligible employees, who can then opt out of participation if they want. The amount automatically deferred each year will range from 3% to 10% of an individual’s income. The new mandate will not apply to small companies with fewer than 10 employees or that have been in business less than three years, church plans, or governmental plans.

Improved Coverage for Part-time Workers

Prior to the 2019 SECURE Act, employers could exclude long-term employees who worked part-time (less than 1,000 hours in a 12 month period) from participating in their retirement plan. The SECURE Act required employers with retirement plans to allow employees who worked at least 500 hours for three consecutive years to make elective deferrals to their retirement plan, starting in 2024. The SECURE Act 2.0 expands on this improvement by reducing the number of required years of service from three to two years, starting in 2025.

Increased Incentives for Smaller Employers

The 2019 SECURE Act gave businesses with up to 100 employees a tax credit equal to 50% of retirement plan start-up costs, with an annual of $5,000. The SECURE 2.0 reduces the threshold to 50 employees, and raises the tax credit to 100% of start-up costs. Employers with 51-100 employees can still enjoy the same 50% tax credit as before.

The new legislation also allows employers to provide starter 401(k) or 403(b) plans, for those without a retirement plan, and would streamline regulations and lower administrative costs. The plan would require all employees to be automatically enrolled (with the ability to opt out) at a 3-15% compensation deferral rate. The limit on annual deferrals would be $6,500 with a $1,000 catch-up provision beginning at age 50, the same limit as IRA contributions. 

Student Loans and 401(k)

Effective in 2024, employers can make matching contributions to employee retirement plans based on the employee’s student loan payment amount. The intent is to give employers the opportunity to help their employees who may be overwhelmed by student debt and cannot take advantage of employer matching contributions because they are making loan payments instead. 

529 Plan to Roth IRA

Under existing law, 529 education savings plans that have remaining funds unused for qualified educational expenses can be distributed, but the earnings portion of the distribution is subject to income tax and a 10% penalty. Starting in 2024, if certain requirements are met, owners of 529 accounts that have been opened for at least 15 years can roll up to a total of $35,000 of the remaining 529 account balance into a Roth IRA for the named beneficiary, tax and penalty free.  The annual amount rolled to a Roth IRA cannot exceed the annual IRA contribution limits, and contributions made in the previous five years (or earnings from those contributions), are not eligible to be rolled into a Roth IRA. This change will hopefully encourage more people to save for college funding, and worry less about over-funding their 529 accounts.

New rules for qualified charitable distributions (QCDs)

IRA owners aged 70 ½ or older with charitable intent can donate up to $100,000 a year to a qualified charity, directly from their IRA. Known as Qualified Charitable Distributions (QCDs), these satisfy the Required Minimum Distribution, and the distribution is not included as taxable income. The SECURE Act 2.0 expands on QCDs by allowing for a one-time $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts, effective for distributions made from 2023 forward. The new legislation also indexes the annual IRA charitable distribution limit of $100,000 to inflation.


As you can see from the SECURE Act 2.0 summary above, the legislation covers a broad range of retirement topics that could affect people of all ages and in several different phases of life. It would be a good idea to review your personal circumstances, and speak to an Austin financial advisor if you have any questions about the new law’s potential impact on your retirement planning. We are here to help, so please feel free to reach out to us.

About Author

Scott Adair, CFP®

Your wealth management goals are in good hands. Scott Adair hones in on your investment strategies and comes up with a plan that works for you. Scott is an Investment Advisor Representative and Certified Financial Planner (CFP®). His advice is tailored to each individual client.

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