A long-awaited follow up to the 2019 SECURE Act was included as part of the year-end congressional spending bill enacted on December 29, 2022. The SECURE 2.0 Act of 2022 (“SECURE 2.0”) contains numerous retirement-related provisions that will impact savers, retirees, and employers. Below are a few highlights to note.
Saver’s Match: Lower income individuals are currently allowed a nonrefundable tax credit for making retirement contributions. Beginning in 2027, the tax credit will be replaced by a federal matching contribution deposited into a taxpayer’s IRA or workplace retirement plan. Matched amounts equal 50 percent of a saver’s contribution, up to $2,000, and cannot be withdrawn prior to retirement age without incurring penalties.
IRA Catch-Up Contributions: Current law sets the IRA catch-up contribution limitation for individuals aged 50 or greater at $1,000. SECURE 2.0 indexes this number for inflation starting in 2024.
Workplace Catch-Up Contributions: Currently, employees aged 50 or higher can make additional “catch-up” contributions to workplace retirement accounts, with a 2023 amount of $7,500. Beginning in 2025, for those who have reached ages 60 through 63, SECURE 2.0 increases that amount to the greater of $10,000 or 50 percent more than the regular catch-up amount.
529 to Roth: Beginning in 2024, tax and penalty-free rollovers are allowed from college savings 529 plans to Roth IRAs. The 529 plan must have been open for more than 15 years and a lifetime rollover limitation of $35,000 applies, as well as annual Roth IRA contribution limitations.
Excess Contributions: The 10 percent early distribution penalty will no longer apply to excess IRA contributions that are corrected by a withdrawal.
Required Minimum Distribution (RMD) Age: The age at which RMD’s must begin was increased from 70 ½ to 72 as a result of the 2019 SECURE Act, and now has been upped once more to age 73 starting on January 1, 2023, and to age 75 beginning on January 1, 2033. Those born in years 1951 to 1959 now have a beginning RMD age of 73, and born in 1960 or after have an RMD beginning age of 75.
Reduced RMD Penalty: The penalty for failing to take an RMD is reduced from 50 to 25 percent, or to 10 percent if corrected in a timely manner. Additionally, the time to assess these penalties is effectively reduced by starting the clock when the associated Form 1040 for the year of violation is filed, rather than Form 5329.
Roth Workplace Plan RMDs: Beginning in 2024, workplace Roth retirement account plans will no longer require pre-death RMDs (as is currently the case for Roth IRAs).
Emergency Withdrawals: A 10 percent penalty may apply for early tax-preferred retirement account withdrawals. However, beginning in 2024, SECURE 2.0 allows an exception for distributions used for personal or family emergency expenses of up to $1,000 per year. The withdrawal may be repaid within 3 years. Other penalty-free withdrawals are now allowed with respect to escaping domestic abuse and terminal illness. Additionally, disaster-related withdrawals of up to $22,000 can be taken from retirement plans without being subject to early withdrawal penalties, are taken into income over 3 years, and can be repaid. Disaster provisions are effective for disasters occurring on or after January 26, 2021.
Charitable Distributions: Beginning in 2023, a one-time $50,000 distribution is allowed to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. The annual $100,000 IRA charitable distribution limitation is also now indexed for inflation.
Long-term Care: Starting in 2025, retirement plan distributions may be made penalty-free to cover qualifying long-term care premiums.
Automatic Enrollment: New workplace retirement 401(k) and 403(b) plans put into place after December 31, 2024 are required to automatically enroll new plan participants. An initial employee contribution rate of between 3 and 10 percent is required, with amounts increasing by 1 percent until at least 10 percent contribution is reached. Employees may opt out of participation or change their contribution percentage. Exceptions to automatic enrollment apply to small businesses with 10 or fewer employees, businesses that have been in existence for less than 3 years, church plans, and governmental plans.
Enrollment Incentives: Beginning in 2023, employers can use de minimis financial incentives like gift cards to encourage employees to join workplace retirement plans.
Matching for Student Loan Payments: To help employees with student loans, SECURE 2.0 allows employers to make matching retirement account contributions with respect to an employee’s student loan repayments after 2023.
Credit for Small Employer Pension Startup Costs: The current credit for 3-year small business pension plan startup costs is enhanced for tax years beginning after December 31, 2022. Instead of a credit for only 50 percent of costs, capped at $5,000, the credit is increased to 100 percent of those costs for employers with up to 50 employees. An additional credit is allowed for other than defined benefit plans, fully phased out for employers with over 100 employees.
Part-Time Workers: SECURE 2.0 reduces the length of service required before part-time workers can participate in workplace retirement plans. The 2019 SECURE Act provided that employees who worked at least 500 in three consecutive years were required to be made eligible in an employer’s 401(k) plan. SECURE 2.0 reduces the 3-year rule to 2 years.
Self-Employed Plans: For plan years beginning after December 29, 2022, retirement plans sponsored by sole proprietors or SMLLCs can allow employee contributions up to the date of the employee’s tax return filing date for the initial year.
Roth Workplace Plan Match: Effective December 29, 2022, qualified defined contribution plans may now give participants the option of receiving employer matching contributions on a Roth basis or on a pre-tax basis.
Please reach out to your RubinBrown representative with questions or concerns regarding the impact of SECURE 2.0.
Published: 1/10/2023
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