By David McAlpine, Wealth Management Group Officer
In 2019, the SECURE Act was passed to incentivize retirement planning and increase access to tax-advantaged savings programs. Following its passage, Congress turned its sights to further enhancements with the SECURE Act 2.0. After many years, the Consolidated Appropriations Act of 2023 was signed into law on December 29, 2022. This Act contains the provisions of SECURE Act 2.0.
SECURE Act 2.0 has several new provisions that impact both individuals and employers. Below is a summary of the areas that will be the most impacted as a result of SECURE Act 2.0.
1. Required Minimum Distributions (RMDs)
- Age Change: The age at which owners of retirement accounts must start taking RMDs will increase from 72 to 73 effective 1/1/2023. Beginning in 2033, the RMD age will increase again to 75 for a person who reaches the age of 74 after December 31, 2032.
- If you turned 72 in 2022 or earlier, you need to continue taking RMDs as scheduled.
- Penalty Relief: The penalty for failing to take an RMD will decrease from 50% to 25% of the RMD (or 10% for those who correct the oversight in a timely manner).
- No RMDs on Roth Accounts in Employer Retirement Plans: Roth balances held in an employer retirement plan will be exempt from RMD requirements starting in 2024. Roth IRAs have always been and continue to be exempt from the RMD requirement. This could create an incentive for participants to retain their Roth accounts in their employer sponsored retirement plan for longer.
Individuals have been able to make catch-up contributions into a 401k and other similar employer sponsored retirement plans starting at age 50 ($7,500 additional contribution for 2023); however, with the SECURE Act 2.0, individuals who are 60 to 63 will have an annual catch-up amount of $10,000 (indexed for inflation). Beginning in 2024, individuals who made $145,000 or more in the previous year will need to have all their catch-up contributions made to a Roth account in after-tax dollars.
For SIMPLE IRA plans starting in 2024, the catch-up contribution limit will be increased by 10% ($3,500 for 2023) for those 50 and older. For those ages 60 to 63 beginning in 2025, individuals can make a catch-up contribution equal to the greater of $5,000 or 150% of the catch-up limit for other workers.
Beginning in 2024, the $1,000 catch-up contributions for those 50 and older for an Individual Retirement Account (IRA) will begin to be indexed for inflation in increments of $100.
Individuals have been able to make qualified charitable distributions starting at age 70 1/2; however, Secure Act 2.0 expanded some of the provisions. Starting in 2023, an individual can elect as part of their QCD a one-time gift up to $50,000 (adjusted for inflation) to a charitable remainder trust (unitrust or annuity) or charitable gift annuity. The expansion of the type of charity allows IRA owners the ability to give to charity and satisfy their RMD requirement while still retaining an income stream for the remainder of their lives.
- Matching for Roth Accounts: Previously, employer contributions into an employer sponsored retirement plan were always made on a pre-tax basis. Following the passage of Secure Act 2.0, employers can allow their employees to receive the matching contributions directly into a Roth account. Under this option, employees would recognize the employer match contributions as income immediately, but all future growth on the contributions would not be taxed (as long as the distribution was qualified). This provision will likely take time before employees see it in their 401k plans because payroll systems and plan documents would need to be updated before implementation.
- Automatic Enrollment and Escalation: New 401(k) and 403(b) plans starting in 2025 will be required to automatically enroll eligible employees at a contribution rate between 3% and 10%. Each year following enrollment, employers will need to increase the contribution rate for employees by 1% until it reaches a minimum of 10% (maximum of 15%). Employees will have the option to opt out of the automatic feature. Any existing plans will be grandfathered in and not required to implement this provision.
- Emergency Savings: Employer plans would be able to add an emergency savings account to their plan starting in 2024. Contributions into this account will be limited to non-highly compensated employees and contributions limited to $2,500. This account will allow employees the ability to withdrawal funds from their retirement account for more reasons and more quickly than allowed previously under the “hardship” distribution provisions. While allowed starting in 2024, this provision may take more time before employees see them show up in their retirement plans due to administrative challenges and additional guidance from the government needed.
- Student Loan Debt: If employees are making student loan payments, employers could “match” those payments with contributions into the employee’s retirement account starting in 2024. This provision provides the employee with some options as they balance the need to start their retirement savings as well as paying down student loan debt.
529 plans have long been a tool to save for a child’s or grandchild’s education. The Secure Act 2.0 added some additional flexibility for 529 plan beneficiaries. After 15 years, the assets in a 529 plan can be rolled over to a Roth IRA for the beneficiary (subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000). The rollover is treated as a contribution to the annual Roth IRA contribution limit but can be a great way for maintaining 529 plan assets for a beneficiary in the form of a retirement account.
Many of these provisions will take time to become benefits to individuals as they phase in over time or require changes to employer’s plan documents for certain retirement plans. Further guidance will likely be forthcoming from the federal government on these provisions, but the new SECURE Act 2.0 certainly contains many new provisions designed to help retirement savers.
Contact Peoples Bank Wealth Management Group
If you have questions on how SECURE Act 2.0 affects your individual situation or need help with any of your financial needs, please do not hesitate to give us a call at (712) 722-0100, email us at WealthManagementGroup@peoples-ebank.com, or use the Contact Form on this page.
The information is not intended as tax, legal, investment or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.