While most of us were enjoying the holidays with friends and family, Congress passed the SECURE 2.0 Act of 2022, within the Consolidated Appropriations Act of 2023, a major overhaul of retirement vehicles and employer-sponsored plans nearly affecting all Americans with retirement accounts. While not exhaustive, below is a summary of key provisions we wanted to highlight as it relates to your financial planning.
Required Minimum Distributions (RMDs)
In 2023, the age requirement to begin taking RMDs will increase from age 72 to age 73, and to age 75 in 2033. In addition, the penalty for not taking an RMD is reduced from 50%, currently, to 25%, and in some cases to 10% if the error is corrected "in a timely manner." Effective 2024, Roth accounts in employer-sponsored plans, such as 401(k) plans, will be exempt from the RMD rules while the participant is alive.
In 2023, participants age 50 and older can contribute an extra $7,500 per year annually into their 401(k) account. Effective 2024, all catch-up contributions for participants earning more than $145,000 from prior year wages, will have to be made on a Roth basis. Additionally, IRA/Roth IRA catch-up contributions (now $1,000) will be linked to inflation and adjusted in $100 increments. Lastly, effective 2025, a “special” catch-up provision of the greater of: $10,000 or 150% of the “regular” catch-up contribution will be permissible for individuals ages 60-63.
In 2023, SEP IRA and SIMPLE IRA plans will allow Roth contributions. Also, plans will allow employer matching contributions to be made on a Roth basis. Even though this is law, it will take some time for the custodians to implement this change in reporting.
Under the new law, plan participants generally will be able to withdraw up to $1,000 per year from their retirement savings account for emergency expenses without having to pay the 10% tax penalty for early withdrawal if under age 59½. In addition, companies could allow employees to set up an emergency savings account through automatic payroll deductions. These contributions would be limited to $2,500.
Unused or leftover funds in 529 plans can potentially be rolled over to the beneficiary’s Roth IRA. There are many caveats to this rule including the plan being in place for a minimum 15 years, the annual rollovers cannot exceed the annual Roth IRA contribution limit, and the total lifetime rollovers cannot exceed $35,000. It appears earned compensation and the income eligibility thresholds normally applicable to Roth IRA contributions do not apply to these transfers.
Student Loan Debt
In 2024, student loan payments could count as retirement contributions for the purpose of qualifying for matching contributions in a workplace retirement account. This means employers will be able to make contributions to their company retirement plan on behalf of employees who are paying student loans instead of saving for retirement.
In 2025, employers who start new retirement plans will be required to automatically enroll employees in their retirement plan at a rate of at least 3%, but not more than 10%. Excluded from this requirement are new companies in business for less than 3 years and businesses with 10 or fewer workers.
Qualified Charitable Distributions
QCDs remain permissible starting at age 70 ½ for IRA owners. However, effective 2024, the amount, currently limited to $100,000, will be linked to inflation and adjusted in $1,000 increments for those who take advantage of this IRA charitable strategy.
As many of the above provisions become effective over the coming years, requiring document amendments by employer-sponsored plans, stay tuned for more information from us and your employer’s plan custodian.
If you have any questions on the Secure 2.0 Act, please feel free to reach out to your advisor directly.
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