The passage of the SECURE Act 2.0 provides a slate of retirement changes that could improve the retirement system for many people.
The new law supplements earlier legislation that increased the age for required minimum distributions (RMDs) and allowed for additional retirement options. Below are the major changes to be aware of that affect employers and employees alike.
Changes Impacting Retirees
- Increases RMD age from 72 to 73 starting January 1, 2023, and to 75 starting January 1, 2033.
- Decreases RMD penalty from 50% to 25% starting in 2023. The penalty can be reduced to 10% for IRA owners who take the RMD within a specified time period and submit a corrected tax return.
- Employer-sponsored Roth retirement plans (Roth 401(k) plans) will be exempt from the RMD requirements starting January 1, 2024.
- Starting January 1, 2025, taxpayers 60 – 63 years old will be able to make catch-up contributions of up to $10,000 per year, indexed for inflation.
- This is an increase in the current $7,500 catch-up contribution for people aged 50 and older. IRA catch-up contribution of $1,000 will be indexed for inflation, which will increase the amount people age 50 and over can contribute to IRAs starting in 2024.
- Catch-up contributions must be made after-tax/Roth basis for any plan participant whose wages exceed $145,000, effective for tax years after 2023.
Qualified Charitable Distribution RMD
- Taxpayers 70½ and older may now elect a one-time gift of up to $50,000 to a charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity.
Changes Impacting Savers
Student Loan Savings Plan
- Starting January 1, 2024, employers can make matching contributions to an employee’s retirement account when the employee makes a payment toward their qualified student loans. This will allow employees not to forego an employer matching contribution when they decide to pay down their student loans instead of contributing to retirement.
529 Plan Updates
- If a 529 Plan has excess funds after the beneficiary completes their education, the account has been open for at least 15 years, and certain other requirements are met, the excess funds can now be rolled over to a Roth IRA for the beneficiary. The rollover is treated as a contribution subject to the annual Roth IRA contribution limitation as well as an aggregate lifetime limit of $35,000.
Savers Credit Updates
- The “Savers Credit” has been repealed and replaced with a matching IRA/retirement plan contribution. The match is 50% of the contributions up to $2,000 per individual. The match phases out between $41,000 and $71,000 for married taxpayers ($20,500 to $35,500 for single taxpayers).
Changes Impacting Employers
- Starting in 2025, new 401(k) and 403(b) plans will be required to automatically enroll employees at a rate of at least 3% but at most 10%. The amount increases each year thereafter from 3% to 10% but at most 15%. All current plans are exempt from this rule.
Starter 401(k) Plans
- Starter 401(k) plans allow employers with no current retirement plans to create a plan with no contribution requirements and no major year-end testing requirements. This is a great option for small businesses looking to add a retirement savings plan without incurring the hefty administrative cost. Contribution limits are the same as IRAs, $6,000 per year with an additional $1,000 catch-up contribution.
Ability to Offer Small Financial Incentives to Enrollment
- De minimis financial incentives (like gift cards) are now allowable to incentivize employees to enroll in an employer-sponsored retirement account.
If you have questions about the SECURE Act 2.0 or how it affects your business, please contact a member of our Business Tax Services Team.