The SECURE 2.0 Act of 2022 is set to make big changes in retirement plans for employees and small-business owners alike.
The passage of the SECURE 2.0 Act into law means Americans can look forward to changes in the way retirement plans work in the coming year. The goal is to make it easier for Americans to save as well as helping small-business owners to offer more (and more comprehensive) retirement plans. The new law is designed to do this in a number of different ways – it actually includes more than 90 provisions. Some of the most impactful changes are:
* an increase in age for RMDs,
* larger catch-up contributions for workplace retirement plans,
* a new “Starter K” plan for employers with no retirement plan,
* automatic 401(k) enrollment for new employees, and
* new ways to move prepaid tuition funds to Roth IRAs.
But the law also introduces other changes in savings, like a provision for the “Saver’s Match” – a federal matching contribution to IRAs – and another provision for pension-linked emergency savings accounts – designed to help people avoid tapping into retirement accounts when faced with unexpected emergencies.
Here’s what to expect from SECURE 2.0 for 2023 and beyond.
The required minimum distribution (RMD) age will be increasing. In 2022, you had to start taking withdrawals from a retirement account every year starting at age 72. In 2023, that has changed to age 73, and will go up to age 75 by 2032. The penalty for failing to take these mandatory withdrawals is also dropping from 50% to 25% of the amount that should have been withdrawn.
Currently, anyone age 50 or older can make extra “catch-up” contributions into their retirement accounts, depositing more than the usual maximum deferral amount in order to maximize the tax benefits and interest and set aside as much as possible. Beginning in 2025, people between the ages of 60 and 63 will be allowed to make catch-up contributions of up to $10,000 or 150% of the regular contribution, whichever is greater, to their workplace plan. That amount will be indexed to inflation.
Employers who don’t currently sponsor a retirement plan are now allowed to offer a new starter 401(k) or 403(b) plan, with a boost to the startup credit, making it easier for small businesses to sponsor such plans. All employees should be enrolled in the new plans by default, at a deferral rate between 3% and 15% of their paychecks, up to an annual limit of $6,000. Over and above that annual deferral, employees at age 50 can make an additional $1,000 in catch-up contributions.
Prepaid-Tuition Retirement Rollovers
It will soon be possible to make limited transfers from a 529 plan to a Roth IRA account. Starting in 2024, if you’ve maintained a prepaid tuition plan for 15 years or longer, funds from that 529 plan can be moved into a Roth IRA plan in the name of the 529’s beneficiary. These transfers can’t be larger than any regular contributions made to a traditional IRA or Roth IRA for the year. And there’s a lifetime cap of $35,000 that can be rolled over from a 529 into a retirement plan like this.
Previously, federal matches for IRA and retirement credits were paid as a nonrefundable credit put toward a tax refund, or a credit against taxes owed. That’s been changed to a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan, regardless of any taxes owed or refunded. The government will match 50% of your retirement contributions up to $2,000 per individual. It does gradually phase out at various levels based on how you file taxes: single, married filing jointly or separately, and head of household. This provision, as you can probably tell, involves some complicated mechanisms for getting those deposits worked out smoothly, so isn’t slated to come into effect until 2026.
Employers now have the option to help protect retirement plans by offering pension-linked emergency savings accounts to non-highly compensated employees. Those workers can be automatically opted into these accounts at no more than 3% of their salary, with contributions capped at $2,500 or less, if the employer chooses. The cap also serves as the maximum account balance. The account is meant to provide a buffer in case of personal or family emergency expenses, and the first four withdrawals each plan year may not be subject to any fees or charges.
When an employee moves on to a new position, these emergency savings accounts can be rolled into an IRA or taken as cash.
From 2023 on, a separate provision of the new law also makes it possible, once per year, to withdraw up to $1,000 from an IRA for personal or family emergency expenses without having to pay the usual 10% early distribution penalty. You’ll have the option to repay the distribution within three years and won’t be allowed to take further emergency distributions during the three-year repayment period unless the fund has been repaid.
If you’ve got any more questions about how SECURE 2.0 affects your savings – and what options it makes possible – ask us! We would love to chat with you.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Background: https://www.napa-net.org/news-info/daily-news/breaking-news-final-secure-20-included-year-end-spending-bill / https://www.napa-net.org/sites/napa-net.org/files/SECURE%202.0%20Reference%20Guide_GPS_122622.pdf