What you need to know about the secure act 2.0
In a rare occurrence, the recently passed Consolidated Appropriations Act of 2023 enjoyed broad bipartisan support and President Biden signed it into law on December 29, 2022.
This Consolidated Appropriations Act also included the Setting EveryCommunity Up for Retirement Enhancement (SECURE) 2.0 Act which builds on the previously passed SECURE Act of 2019 and contains 92 new provisions promoting retirement savings, offering more retirement account flexibility and incentivizes businesses as it relates to offering retirement plans.
In reading through the various provisions of the SECURE Act 2.0, which is voluminous to say the least, a few things come to mind. One, the government has not made the collection of tax revenues from its citizens any quicker as they have increased the amount we can contribute pre-tax into our retirement plans and they have pushed out the age at which we are mandatorily required to take withdrawals from these pre-tax retirement accounts. Both of these provisions would seem to suggest a slower collection of tax revenues.
Secondly, although there are provisions making it easier and essentially mandatory that every employee, no matter what their income levels are, be automatically enrolled in their employer’s retirement plan, the vast majority of the SECURE 2.0 Act provisions are more friendly to the wealthy. For example, allowing larger catch-up contributions after you turn the Age of 60 along with moving out the Age at which it is mandatory that you start taking withdrawals from your pre-tax retirement accounts doesn’t exactly benefit someone who is not a high income earner and struggles to save money.
Below is a recap of the major provisions of the SECURE Act 2.0 that we feel will have the most impact on our clients as there are just too many provisions to list them all in one article. If, after reading over these highlights, you have any questions whatsoever please do not hesitate to reach out.
Enjoy!!
SECURE Act 2.0 Provisions
“Catch-up” Contributions will be indexed by inflation and increases for 60–63 year-olds
Beginning in 2024, all “Catch-up” amounts will be indexed for inflation on an annual basis.
Starting in 2025, if you are between the ages of 60-63 your “Catch-up” amount is the greater of either $10,000 or 150% of the regular catch-up contributions to your 401(k), 403(b), or 457(b) plan.
Required Minimum Distribution (RMD) ages from qualified retirement plans have been pushed back
The RMD age increases to age 73 in 2023 and to age 75 in 2033. Currently the RMD age is 72 and it used to be age 70.5 prior to 2020.
Qualified Charitable Distributions (QCDs) of up to $100,000/year from an IRA are still allowable beginning at Age 70.5.
Roth 401(k) and 403(b) holdings no longer fall under the RMD rules
Currently, if you have Roth dollars in your 401(k) or 403(b) account, these amounts were falling under the RMD Rules mentioned above even though a Roth IRA has no RMD requirement. This oversight has now been corrected.
Employer Matching Contributions can now be made either in the form of a Roth (after-tax) contribution or a Pre-tax contribution
Currently only pre-tax matching contributions were allowed.
The employee would be taxed on any Roth (after-tax) matching contributions their employer makes into their retirement account on their behalf.
A limited amount of your 529 Accounts can now be rolled over into a Roth IRA that bears the same Beneficiary’s name
529 rollovers into a Roth IRA are allowed under the following conditions:
Your 529 has been open for > 15 years.
529 rollover amounts into a Roth IRA have to have been contributed into the 529 at least 5 years prior to the date of the rollover.
A Beneficiary’s annual 529 rollover amount is subject to the annual Roth IRA contribution limits and the Beneficiary must have earned income of at least the same amount as the rollover amount in that same year. The Beneficiary cannot also make their own Roth IRA contribution in the same year.
A Beneficiary’s lifetime 529 rollover to a Roth IRA is limited to $35,000 in total.
Reduction in the tax penalty one pays if they do not fully satisfy their annual RMD
If you fail to take your full RMD in any given year, the tax penalty on your shortfall has been reduced from 50% to 25% of the shortfall amount. If this shortfall is corrected within two years, this tax penalty is further reduced to 10%.
Roth SIMPLE and SEP IRAs are now allowable
Previous to the SECURE 2.0 Act only Pre-Tax SIMPLE and SEP IRAs were allowed.
Non-Exempt 401(k) and 403(b) Plans are required to “Auto-Enroll” any new employee
Unless exempted (see below), all employers offering a 401(k) or 403(b) plan must automatically enroll any eligible employee at a contribution percentage of between 3% – 10%. Employees can opt out thereafter if they so choose.
Exempted employers include businesses with 10 or fewer employees, businesses < 3 years old, SIMPLE plans and church or governmental plans.
Allows Employers offering a 401(k), 403(b), 457(b) or SIMPLE IRAs to make a “matching” retirement contribution into an employee’s retirement account equal to what the employee pays toward their student loans
In order for this employer student loan payment “matching” retirement contribution to be allowable, the following requirements must be met:
Available to all participants eligible to defer money and receive matching contributions.
This student loan payment match must be at the same rate as matching contributions on elective deferrals.
This student loan payment match is subject to the same vesting schedule as the matching contributions on elective deferrals.
Increased start-up tax credit to incent small employers to set up a retirement plan
Increases the 3-year small business startup credit from 50% to 100% of administrative costs up to an annual cap of $5,000.
A full credit for employer contributions is limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees.