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Did you know? You have new options for your retirement plan thanks to the SECURE Act.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was enhanced when SECURE 2.0 was signed into law by President Biden on December 29, 2022. So what does this mean for you?
The SECURE 2.0 Act aims to improve retirement-savings opportunities through three main objectives: encourage retirement savings among Americans, strengthen retirement rules, and reduce the cost to employers of establishing retirement plans.
The Act added 92 new provisions and some of these changes started going into effect on January 1st of this year. Many others will take effect in 2024, while some will not take place until 2025 through 2028. And one provision even has retroactive application as far back as January 26, 2021.
From student loans, Required Minimum Distributions (RMDs), ROTH accounts, automatic enrollments, eligibility and more, here’s everything you need to know about SECURE 2.0 so you can make informed decisions for your financial future.
Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans. For example, if you pay off $500 of your student loan debt, your employer could contribute $500 to your 401(k). This could have huge implications for student loan debtors because it eliminates the push and pull between paying off debt and saving for retirement. The change in this law will allow you to do both simultaneously.
From the time this law first came out and for 30 years thereafter, individuals were required to begin taking distributions from their retirement at age 70 ½ until it changed with the original SECURE Act to age 72 beginning in 2020. With SECURE 2.0, the age is further pushed back as follows:
What does this mean for you (or your aging parents)? Because of the timing, no retirement account owners will start making new RMDs in 2023 or 2033 (because of their age, if you were born in 1951 or 1961).
For the most part, pushing back the age for RMDs is a neutral-to-positive change for most people. If you already need to take distributions beyond the RMD level to support living expenses, the change is irrelevant. But for others, it may allow you to push off retirement-account income for a few more years in an effort to stave off higher Medicare Part B/D premiums and, perhaps, to have a few more years of tax-efficient Roth conversions.
Note that these changes in the ages do not impact the date when you can start making Qualified Charitable Distributions (QCDs), which is still at age 70 ½.
ELIMINATION OF RMDS FOR PLAN ROTH ACCOUNTS
Effective in 2024, RMDs for Roth accounts in qualified employer plans are eliminated. Currently, while Roth IRAs are not subject to RMDs during the owner’s lifetime, employer plan Roth accounts, such as Roth 401(k) plans, Roth 403(b) plans, governmental Roth 457(b) plans, and the Roth portion of the Federal Thrift Savings Plan, are subject to the regular RMD rules, making them subject to RMDs beginning at age 72. This puts Roth accounts and Roth IRAs on more of a level playing field.
MANDATORY 'ROTHIFICATION’ OF CATCH-UP CONTRIBUTIONS
Starting in 2024, certain high-income taxpayers will be required to make catch-up contributions for Roth contributions to 401(k), 403(b), and governmental 457(b) plans. Eligible participants whose wages exceed $145,000 in the previous calendar year are subject to this requirement. Self-employed individuals (e.g., sole proprietors and partners) will continue to have the opportunity to make pre-tax catch-up contributions, even if their income from self-employment is higher than $145,000. Seek advice if you change employment as these rules may not apply. Also, if an employer’s plan does not allow catch-up contributions to a Roth, then these new rules will not apply to that plan.
EMPLOYER CONTRIBUTIONS ELIGIBLE FOR ROTH TREATMENT
Effective upon enactment, employers can deposit matching and/or nonelective contributions to employees’ Roth accounts (Roth accounts in 401(k) and 403(b) plans). These amounts will be included in the employee’s income in the year of contribution, and must be nonforfeitable (i.e., not subject to a vesting schedule).
529-TO-ROTH IRA TRANSFERS ALLOWED (WITH CONDITIONS & LIMITATIONS)
Under the following conditions and beginning in 2024, some individuals will be able to move Section 529 plan money directly into a Roth IRA:
CREATION OF SIMPLE ROTH IRAS AND SEP ROTH IRAS
You can now create both SIMPLE Roth accounts and SEP Roth IRAs. Previously, SIMPLE and SEP plans could only include pre-tax funds. The amounts contributed will be included in your income. This provision was more for operational efficiency than to actually bring to life new planning opportunities. Individuals who receive SEP contributions have long had the opportunity to immediately convert those dollars to a Roth IRA if they chose to do so. Similarly, SIMPLE IRA participants were already able to make such Roth conversions after the SIMPLE IRA had been funded.
Beginning in 2025, employers will be required to automatically enroll eligible employees in new 401(k) or 403(b) plans (existing 401(k) plans are not required to auto-enroll employees, just newly created plans). The minimum participation amount that will be withheld is 3% of your gross wages. The maximum is 10%. Each year thereafter, the contribution increases by 1%, up to a minimum of 10% and a maximum of 15%. Employees can opt out of the plan if they wish. Small businesses (with 10 or fewer employees), new businesses (fewer than three years old), church plans, and government plans are exempted from the provision.
Before this act, employers were not required to offer 401(k) benefits to employees who worked less than 1,000 hours. The original SECURE Act made them available to employees who worked 500 hours or more for three consecutive years, starting in 2021. SECURE 2.0 lowers the threshold even further, requiring only two consecutive years at 500 hours or more to be eligible for your employer's 401(k) plans.
Currently, people aged 50 and older can make catch-up contributions of $7,500 to their 401(k)s in 2023. The SECURE 2.0 Act bumps that up to $10,000 in 2025. However, this is only for those between 60 and 63.
People with disabilities can save in a manner akin to 529 plans through ABLE accounts, often known as 529A plans. But, as long as the money is utilized for approved disability expenditures, withdrawals are always tax-free. Since a person's handicap cannot be separated from them, most costs they incur on a daily basis qualify as eligible expenses. If you rely on SSI, there is a $100,000 ceiling on savings; but, if you do not, the limits are less of an issue. The lifetime donations vary by state but are typically greater than $500,000. Presently, if you were 26 years old or younger when your handicap first manifested, you are not eligible to invest in a tax-advantaged ABLE account. The SECURE 2.0 Act raises the age of onset to 46, effective in 2026. If you are eligible for an ABLE account, you can use it to supplement your retirement savings without age restrictions on withdrawals.
Starting in 2024, if your workplace offers retirement accounts, they may permit you to fund a Roth for emergency savings. You are allowed four withdrawals each year and can save up to $2,500 in total. The restriction is that in order to use this, you must not be a highly compensated employee. The new Roth emergency savings account could be used by the person with the lower income in households where one partner earns significantly more than the other.
From time to time, after certain natural disasters (e.g., hurricanes, wildfires, floods, tornadoes), Congress has authorized affected individuals to access retirement funds without a penalty for a limited time. At the time of SECURE Act 2.0’s passage, however, all such provisions had expired. Thankfully, the SECURE Act 2.0 eliminates the need for Congress to re-authorize such distributions for each disaster (or series of disasters) by “permanently” reinstating so-called “Qualified Disaster Recovery Distributions” retroactively to disasters occurring on or after January 26, 2021. To qualify for such distributions, an individual must have their principal place of abode within a federally declared disaster area, and they must generally take their distribution within 180 days of the disaster.
Unfortunately, whereas disaster distributions were historically limited to a maximum of $100,000, SECURE 2.0 sets the maximum amount of a disaster distribution at $22,000. Such distributions are, however, eligible to be treated similarly to previously authorized disaster distributions in a number of ways. For instance, the income from Qualified Disaster Recovery Distributions is able to be spread evenly over the 3-year period that begins with the year of distribution (or, alternatively, to elect to include all of the income from the distribution in income in the year of distribution). In addition, all or a portion of the Qualified Disaster Recovery Distribution may be repaid within 3 years of the time the distribution is received by the taxpayer.
Here are just some of the other 92 items that you might want to research further:
Because there are so many changes that can impact your retirement plans, it is even more important to make sure you consult with your financial and tax advisors to make sure you are both complying and benefiting as much as you possibly can from SECURE 2.0.
