What Does SECURE 2.0 Do for RMDs and Catch-Up Contributions?

The SECURE 2.0 Act contains at least two key provisions that mandate age-specific changes. The first is that the age for taking required minimum distributions increased from 72 to 73 in 2023 and will again to 75 in 2033.

The second provision is that those aged 60 through 63 will be allowed to make additional catch-up contributions in addition to those available to participants older than 50, in what might be called super catch-up contributions.

Super Catch-Up

The super catch-up provision takes effect in 2025, and the super catch-up amount will be the greater of $10,000 or 50% more than the ordinary catch-up amount in 2025. Both figures will be indexed to inflation starting in 2026. The ordinary catch-up limit for participants 50 and older is $7,500 for 2023.

In other words, if the super catch-up provision took effect in 2023 (it starts in 2025), it would add a 50% increase to $7,500, which is $11,250, on top of the normal contribution limit of $22,500 for 2023, which would result in a total maximum contribution of $33,750, but only for those aged 60 through 63.

The 60 through 63 age range was the proposal from the Senate Committee on Finance in a bill called the EARN Act. The House version, called the Securing a Strong Retirement Act of 2022, had a similar provision, but with an age range of 62 through 64. It is not clear why the slightly younger age range was chosen, but given the origins of other provisions, such as waiting until 2033 to increase the RMD age to 75, it was likely related to budget scoring concerns.

According to Brigen Winters, the chair of the policy practice at the Groom Law Group, all catch-up contributions made by highly compensated employees, meaning those making $145,000 or more per year, must be into a Roth account. This applies to both normal and super catch-up contributions and is designed to be a “revenue raiser” for the federal government to offset other provisions that cost the Treasury money.

Allison Brecher, the general counsel at Vestwell, says this will be a challenge for recordkeepers, who must now “track age three times” for catch-up contributions: those aged 50 through 59, those 60 through 63 with the super catch-ups, and then those 64 and up. Additionally, all highly compensated employees’ contributions must be to a Roth account. She says tech-savvy recordkeepers with strong access to payroll records will have an enormous advantage.

The ordinary contributions of participants in those age ranges are unaffected and may be put into a pre-tax account, and non-HCEs can contribute all catch-ups pre-tax as well.

Michael Hadley, a partner in the Davis & Harman law firm and a member of the Society of Professional Asset Managers and Recordkeepers (SPARK) Institute’s advocacy team, agrees this will be a major challenge for recordkeepers, perhaps the biggest one coming from the new law. Ensuring compliance with this mandatory change, effective 2024, may even cause some recordkeepers to postpone enactment of optional changes that also have effective dates of 2024, such as creating emergency “sidecar” savings accounts.

Concern over administering this provision is something of a theme in the retirement industry. David Stinnett, the head of strategic retirement consulting at Vanguard, also admits that the Roth provision for HCE catch-up provisions will be administratively complicated.

RMD Age Increase

SECURE 2.0 also increased the RMD age to 73 in 2023 and to 75 starting in 2033.

Congressman Richard Neal (D-Massachusetts), chairman of the House Committee on Ways and Means, remarked in a press call after SECURE 2.0’s passage that the increase in the RMD age was primarily motivated by the reality that Americans’ lifespans are increasing. According to Harvard Medical School, American lifespan actually decreased to 76 in 2021, from a peak of 79 in 2019, mostly due to pandemic deaths and deaths of despair.

Brecher says that the RMD increase is a reflection of people working longer. She adds that the RMD provision also allows surviving spouses to be treated as an employee for the purpose of applying the RMD age to the surviving spouse’s collection of their deceased spouse’s retirement account. She notes that the provision does not change the RMD exemption for most people who continue working past RMD age.

Mark Iwry, a nonresident senior fellow in economic studies at the Brookings Institution and formerly a senior adviser to the Secretary of the Treasury for retirement and health policy, says that increasing the RMD age was long lobbied for by asset managers as a way to keep more assets invested.

Iwry regrets that an alternative proposal was not used instead. He said he would have preferred if those in their 70s with small or midsize tax-preferred retirement accounts were completely exempted from the RMD. He argues that since RMD rules are complex, there is a large penalty for noncompliance, and many seniors are losing mental capacity in their old age, exempting non-wealthy participants would enable them to save on their own terms while still preventing the wealthy from accumulating longer on a tax-deferred basis.

Section 302 of SECURE 2.0 also reduces the penalty for failing to comply with RMD from 50% to 25% on the required amount not withdrawn, reducing it further down to 10% if it is corrected within two years, according to Winters.

Section 325 of SECURE 2.0 will remove the pre-death RMD requirement for Roth 401(k) accounts entirely so that they are like Roth IRAs. This provision takes effect in 2024.

Kristen Carlisle, vice president and general manager of Betterment at Work, says both the RMD and catch-up provisions could make it somewhat easier to adjust to a future in which Social Security benefits are reduced. The catch-up provisions will allow workers to save extra money before retiring and collecting Social Security, and the RMD age increase will give them more time to accumulate more savings.