On December 23, 2022, Congress passed the Consolidated Appropriations Act of 2023. The sprawling year-end spending “omnibus” package includes many provisions that will help Americans save more for retirement.

The Setting Every Community Up for Retirement Enhancement 2.0 Act is also known as SECURE 2.0.

SECURE 2.0 is meant to build on the original SECURE Act, which was signed into law at the end of 2019 and addresses a wide array of areas that make major changes to retirement planning including the required minimum distribution (RMD) rules and other retirement provisions. Note: The benefits of the law will kick in over several years.

Here’s a brief rundown of some of the key provisions and when they will become effective:

1. Increase in the age for beginning RMDs. Employer-sponsored qualified retirement plans, traditional IRAs and individual retirement annuities are subject to RMD rules. They require that benefits be distributed or start being distributed by the required beginning date.

Under the new law, the required age used to determine distributions increases from age 72 to age 73 starting on Jan. 1, 2023. It will then increase to age 75 starting on January 1, 2033. This change allows people to delay taking RMDs and paying tax on them. The law also relaxes the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%. If the failure is corrected in a “timely” manner, the penalty would drop to 10%.

2. Higher “catch-up” contribution for participants aged 60 through 63. Currently, participants in certain retirement plans can make additional catch-up contributions if they’re age 50 and older. The limit on catch-up contributions is $7,500 for 2023. Secure 2.0 will increase the 401(k) plan catch-up contributions limits to the greater of $10,000 or 150% of the regular catch-up amount for individuals aged 60 through 63. The increased amounts will be indexed for inflation after 2025. This provision will take effect for taxable years beginning after December 31, 2024. (There will also be increased catch-up amounts for SIMPLE plans.)

The law also changes the taxation of catch-up contributions, though, which could reduce the upfront tax savings for those who max out their annual contributions. Catch-up contributions will be treated as post-tax Roth contributions. Previously, you could choose whether to make catch-up contributions on a pre- or post-tax basis. An exception is provided for employees whose compensation is $145,000 or less (indexed for inflation).

3. Qualified charitable distributions (QCDs). QCDs have gained in popularity as a way to satisfy RMD requirements while also fulfilling philanthropic goals. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity after the age 70 1/2. You can’t claim a charitable deduction, but the distribution is removed from taxable income.

Under the new law, you also can make a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). The law also indexes for inflation the annual IRA charitable distribution limit of $100,000.

4. Better coverage for part-timers. The first SECURE Act requires employers to allow long-term, part-time workers to participate in their 401(k) plans with a dual eligibility requirement (one-year of service and at least 1,000 hours worked or three consecutive years of services with 500 hours worked). The new law will reduce the three-year rule to two years, beginning after December 31, 2024. This provision would also extend the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.

5. “Starter” 401(k) plans for employers with no plan. The new law will allow an employer that doesn’t sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan) that would require all employees to be default enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit with an additional $1,000 in catch-up contributions beginning at age 50. This provision takes effect beginning after December 31, 2023.

6. Tax credit for small employer pension plan start-up costs. To incentivize small businesses to establish retirement plans, SECURE 2.0 creates or enhances some tax credits. For example, it increases the startup credit from 50% to 100% of administrative costs for employers with up to 50 employees. Additional credit is available for some non-defined benefit plans, based on a percentage of the amount the employer contributes, up to $1,000 per employee.

7. Retirement savings for military spouses. SECURE 2.0 creates a new tax credit for eligible small employers for each military spouse that begins participating in their eligible defined contribution plan.

8. Age increased for qualified ABLE programs. Tax-exempt ABLE programs are established by states to assist individuals with disabilities. Before the new law, in order to be the beneficiary of an ABLE account, an individual’s disability or blindness must have occurred before age 26. SECURE 2.0 increases this age limit to 46, which will make more people eligible to benefit from an ABLE account. This provision is effective for tax years beginning after December 31, 2025.

9. Tax-free rollovers from 529 accounts to Roth IRAs. The new law permits a beneficiary of a 529 college savings account to make direct rollovers from a 529 account in his or her name to a Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete. The 529 account must have been open for more than 15 years and other rules apply. The provision is effective for distributions beginning in 2024.

10. First responder retirement payments excluded from income. The new law allows law enforcement officers, firefighters, paramedics, and emergency medical technicians to exclude from gross income certain service-related disability pension or annuity payments after they reach retirement age. The exclusion would be effective for amounts received after December 31, 2026.

11. Automatic enrollment in retirement plans. Under the new law, 401(k) and 403(b) plans will be required to automatically enroll employees when they become eligible, beginning with plan years after December 31, 2024. Employees will be permitted to opt-out. The initial automatic enrollment amount would be at least 3% but not more than 10%. Then, the amount would be increased by 1% each year thereafter until it reaches at least 10%, but not more than 15%. All current 401(k) and 403(b) plans are grandfathered. Certain small businesses would be exempt from this requirement.

12. Penalty-free withdrawals for emergencies. The tax code imposes a 10% penalty on the taxable amount of withdrawals from retirement accounts, such as 401(k) plans and IRAs, received before age 59½. There are several exceptions to the 10% tax on early distributions. SECURE 2.0 adds a new exception for certain distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions made after December 31, 2023.

13. “Matching” contributions for employees with student loan debt. The law also aims to help employees who miss out on their employers’ matching retirement contributions because their student loan obligations prevent them from making retirement contributions. It allows them to receive matching contributions to retirement plans based on their qualified student loan repayments. Employers can make matching contributions to 401(k) plans or SIMPLE IRAs. These provisions are effective for contributions made for plan years beginning January 1, 2024.

These are only some of the provisions in SECURE 2.0. The entire omnibus law is sure to generate additional questions and guidance. We’ll keep you apprised of the developments that could affect your financial health.