On December 29, 2022, President Biden signed into law a $1.7 trillion spending package, which includes the SECURE 2.0 Act, legislation that changes the rules on saving for retirement and emergencies and withdrawals from retirement plans. The good news is that it opens up opportunities to save more and expands on tax benefits for Roth IRAs and 401(k) plans.
Many of the SECURE 2.0 Act’s provisions take effect on January 1, 2023, while others may take years to implement. Here’s a summary of key provisions in the SECURE 2.0 Act and how they may affect your retirement savings goals.
If you are a client of Curtis Financial Planning, we will discuss these changes as they pertain to your situation, ensuring that you maximize every opportunity.
Changes to Required Minimum Distributions (RMDs)
For those who need to be made aware, this is when you must take withdrawals from your retirement accounts, even if you don’t need the extra income. The IRS wants to collect the deferred tax on these funds. (Remember that Roth IRAs don’t have RMDs, but all other IRAs and retirement accounts do).
- Raises the RMD age to 73 for those who turn 73 between 2023 and 2032. In 2033 and beyond, the RMD age will increase to 75. (Unfortunately, if you turned 72 in 2022 or earlier, you must keep taking RMDs).
- Reduces the IRS’s 50% penalty for failing to satisfy your RMD before the year-end deadline to 25% of the RMD amount. The liability falls to 10% if an individual corrects the discrepancy promptly.
- Roth accounts in employer retirement plans (such as Roth 401k’s) will be exempt from RMDs beginning in 2024. Nothing changes for individual Roth IRAs that have no RMD requirement.
Increases to Catch-Up Contributions per the SECURE 2.0 Act
Catch-up contributions aim to help older people make up for not saving enough earlier in their lives in their IRAs or company retirement plans.
- Currently, if you’re 50 or older and are allowed to contribute to a 401(k) plan at work, in 2022, you can put in up to $6,500 more than younger people. Starting in 2025, individuals between the ages of 60 and 63 can make annual catch-up contributions of up to $10,000 to a workplace plan. This amount will be indexed to inflation.
- Beginning in 2024, the IRA catch-up contribution amount for those 50 and older will be indexed to inflation. Currently, the maximum catch-up is $1000.00 and has been stagnant.
- If your wage income exceeds $145,000 in the previous calendar year, you’ll need to make catch-up contributions to a Roth account in after-tax dollars. Those earning less than $145,000 are exempt from this requirement. The impact of this change is that you will not get a tax deduction for the catch-up contribution as you did with an traditional IRA, but the Roth contribution will grow tax-free.
Employer Matching for Roth Retirement Accounts
Employers can now offer employees the option of receiving matching and non-elective contributions to their Roth retirement accounts. Note that profit-sharing contributions do not qualify. The employer will get a tax deduction, but the employee must pay taxes on these employer contributions.
Changes to Qualified Charitable Distributions (QCDs)
- Currently, IRA owners can transfer up to $100,000 each year to a charity as a QCD. This $100,000 will now be indexed for inflation.
- There is now a one-time maximum $50,000 QCD distribution to a charitable remainder trust (CRUT), charitable annuity trust (CRAT) or charitable gift annuity (CGA). However, with the $50,000 limit the administrative costs to set this up may be prohibitive.
Self-Employed Plan Changes
Sole proprietors can now open up new 401(k) plans for the prior year up until the filing deadline (NOT including extensions) instead of year-end. But as before, self-employed can make contributions up to the extended filing date.
More Flexibility for 529 Plan Balances
The IRS will allow direct transfers from 529 plans (open for at least 15 years) to Roth IRAs starting in 2024. The Roth IRA must be in the name of the beneficiary of the 529 plan. The maximum lifetime transfer is $35,000 and is subject to annual IRA contribution limits. The IRS is working out the details on how to interpret this law.
Key Provisions for Younger Retirement Savers
- Beginning in 2025, employers offering new 401(k) and 403(b) plans must automatically enroll eligible employees at an initial contribution rate of 3%. In addition, employees with low-balance retirement accounts may also have the option to automatically transfer their balance to a new plan when they change jobs.
- Starting in 2024, employers can add a Roth emergency savings account option to employer plans such as 401(k)s. Non-highly compensated employees can contribute up to $2,500 annually, and their first four withdrawals per calendar year will be tax-free and penalty-free.
- Beginning in 2024, employers can “match” an employee’s student loan payments by contributing an equal amount to a retirement account on their behalf.
Help for Part-Time Workers per the SECURE 2.0 Act
Currently, if you are a part-time worker at an employer with a 401(k) plan you can only contribute once you work there for at least 500 hours a year for three years or if you work for over 1000 hours for one year. The new rules will reduce the threshold to 500 hours a year for two years starting in 2025.
Changes for S Corp Owners
Owners of S Corporation stock may take advantage of like-kind exchange non-recognition treatment for their sales to an ESOP, beginning in 2028.
The SECURE 2.0 Act: Bottom Line
This is not an exhaustive list of the provisions, but I chose to write about those that pertain to most people. Also, now that Congress has passed the act, the IRS will provide details on how they will interpret some of the provisions, as clarifications are almost always necessary with a bill as far-reaching as this one.