Secure 2.0 Legislation – Big Changes for Retirement Plans (1 of 2)
On December 29, 2022, President Biden signed the Consolidated Appropriations Act of 2023. The act includes over 350 pages of new retirement plan rules that comprise the much-anticipated SECURE Act 2.0.
SECURE 2.0 implements a long list of significant changes to the tax code as it relates to retirement plans. While some components of the act only apply to larger employer plans, several key changes will impact savers with a self-directed IRA or Solo 401(k) plan.
We plan to spend the next several months parsing through the details and sharing our thoughts.
In this two-part introduction, we will outline some of the new rules that specifically impact individuals with a self-directed retirement plan.
Roth Changes
Congress loves the Roth IRA. They would rather have taxes on $10,000 today to offset current budget goals than leave the government the ability to receive taxes on the $75,000 that same $10,000 might grow to in 30 years.
SECURE 2.0 creates several new Roth incentives to create more short-term revenue to offset current government expenditures.
Whether that is a good long-term strategy or not is questionable. As retirement savers, however, if the government gives us a Roth option, we may want to take advantage.
Roth SIMPLE and SEP IRA Options
Starting in 2023, or as soon as all the plan document and custodial infrastructure is in place, SIMPLE IRA and SEP IRA plans can accept Roth contributions.
For many small businesses that may have avoided setting up a retirement plan in the past, this may be a big incentive to choose a SIMPLE IRA.
Savers with an existing SEP or SIMPLE may start considering a Roth conversion strategy.
Roth Employer Contributions in Solo 401(k) Plans
The employer profit sharing contributions to a Solo 401(k) plan have previously been limited to tax-deferred status only.
Starting with the effective date of the law (December 29, 2022), employer non-elective contributions can be made on a Roth basis.
Considering that Solo 401(k) participants could previously choose to conduct an In-Plan Roth Rollover on tax-deferred employer profit sharing contributions, the net-effect of this change is nominal. The real advantage is simplicity – you can just make the contribution on a Roth basis instead of having to contribute tax-deferred and then convert to Roth.
Unused 529 to Roth IRA
This change is likely to produce much more media coverage than it deserves.
Section 129 of SECURE 2.0 provides the option to move unused 529 plan funds to a Roth IRA.
For people who built up a 529 plan and their child elected not to go to college or earned enough scholarships to not need the money, this is a nice pathway to jump start that child’s Roth IRA.
If a 529 plan has been in place for 15 years, it can be rolled over to a Roth IRA, but there are several caveats.
- The lifetime maximum is $35,000.
- Contributions and earnings within the prior 5-year period cannot be rolled over.
- The rollover may not exceed the normal Roth IRA contribution limit, and is reduced by any Roth IRA contributions made by the plan holder.
- The plan participant must have income to justify the rollover amount, just as they would for a normal Roth IRA contribution.
The real takeaway here is that you should definitely contribute to a 529 plan for your child starting in year one. If the money is not needed for education purposes, it can be used to seed a Roth IRA.
Catch-Up Contributions
Congress seems to have recognized that most people in their 50’s are looking at their retirement plan balances and scratching their heads. Several new means of caching away more savings at the latter end of the career cycle have been added with SECURE 2.0.
Inflation Adjusted IRA Catch-Up Contributions
Starting in 2024, IRA catch-up contributions for those age 50 and older will be indexed to inflation in increments rounded to $100.
The catch-up contribution limit has been $1,000 since 2006.
Catch-Up Booster in Early 60’s
Starting in 2025, employer plan participants will have an enhanced ability to make catch-up contributions to their plan. This will benefit Solo 401(k) and SIMPLE IRA account holders.
For the ages 60 through 63, the catch-up limit is increased to the greater of $10,000 or 150% of the regular catch-up contribution amount for such plans as of 2024.
Roth Catch-Up Required for High Income Plan Participants
We will be looking forward to clarification from the IRS on this one, to be sure.
SECURE 2.0 section 603 stipulates that starting in 2024 a qualified plan participant who has wages from the sponsoring employer for the prior year in excess of $145,000 (to be indexed for inflation) must make catch-up contributions into a designated Roth account within their plan.
It would appear that with respect to a Solo 401(k), this rule will only apply to plan participants with a corporation who pay themselves a W-2 wage. Sole proprietors or those with a LLC or partnership taxed as a pass through will still be able to choose to make catch-up contributions on a tax-deferred basis if they choose, regardless of income.
Note that only employer plans like a 401(k) are impacted by this section. An IRA based plan such as a SIMPLE is not subject to this rule.
Hardship Distributions & Loans
Normally, a 10% penalty applies for early distributions from a retirement plan before normal retirement age of 59 ½. The tax benefits conferred by a retirement plan are designed to help savers accumulate more of a nest egg to retire on. The “rule 72” penalty for early distribution is an incentive to keep that money set aside for future use.
Congress has allowed for certain exceptions in the past, such as an extreme financial hardship or a first-time home purchase.
Secure 2.0 includes several new provisions that exempt an early distribution from the 10% penalty in cases where tapping retirement savings may be considered acceptable.
Qualified Disaster Distributions and Loans Made Permanent
In the past, Congress has specifically authorized penalty free distributions from retirement plans for extreme natural disaster events like hurricanes, floods, and wildfires.
Rather than rely on ad-hoc acts of Congress, Section 331 of the SECURE 2.0 permanently enacts Qualified Disaster Recovery Distributions” (QDRDs). The new rule applies retroactively to disasters occurring on or after January 26, 2021.
An individual qualifies for a QDRD if their primary residence is within a Federally declared disaster area and the distribution is taken within 180 days of the applicable date of the disaster.
The limit on such QDRDs is $22,000, which is less than the more common amount of $100,000 applied in the old per-disaster method.
These distributions also share features of prior disaster declarations and the CARES Act. The tax amount of the distribution can be paid entirely in the first year or spread over 3 years. The distributed amount can also be re-contributed to a qualifying plan within a 3-year window.
Section 331 also allows for larger loans of up to $100,000 with extended repayment periods from 401(k) and similar employer plans in the case of a disaster declaration.
Personal Emergency
With Section 115, Congress opened up a very broad “Emergency Withdrawal” provision starting in 2024.
A taxpayer who experiences “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” can take a distribution without the 10% penalty.
We’re not sure “I really need to see Taylor Swift in concert” applies, but there is definitely a lot of leeway here.
Because the exemption is so broad, it is limited to $1,000 and may only be used once per year.
Further Emergency Withdrawals may not be taken until the prior distribution has been repaid, new contributions to the plan in excess of the distribution amount have been made, or until three years from the prior Emergency Withdrawal.
This new provision is likely intended to encourage those on the lower end of the income ladder to actually participate in retirement savings, knowing they have a way out.
Terminal Illness
Someone certified by a physician to have a terminal illness or physical condition that will reasonably result in death within 7 years can take distributions without a 10% penalty. Such distributions may be repaid within a 3-year period.
This exception is effective immediately.
Domestic Abuse
New rules included in Section 314 of the Act provide for an early distribution penalty exemption in the case of domestic abuse.
A distribution of up to $10,000 may be taken within one year after an incident of abuse. Such distributions may be repaid to the plan within a 3-year period.
For purposes of this new rule, “domestic abuse” is characterized as “physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household”
The effective date of this section is tax years beginning with 2024.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
