By Paige Wang
Part of the $1.7 trillion omnibus bill recently passed by Congress, the Secure Act of 2022 (SECURE 2.0) is a comprehensive legislation intended to encourage retirement savings, simplify retirement plan administration, and help Americans achieve a more secure future.
This landmark legislation includes a number of changes to the retirement planning landscape designed to help strengthen the nation’s overall retirement system – and each Americans’ individual financial readiness for their own retirement. Some of the key highlights of SECURE 2.0 which investors should be aware of include:
- Mandatory automatic retirement plan enrollment and escalation. Starting in 2025, SECURE 2.0 requires all existing 401(k) and 403(b) plans to automatically enroll new employees (when eligible) at a pre-tax level between 3% and 10% – along with 1% annual step ups until a 10% deferral rate is reached (but not more than 15%). Exceptions will be made for small businesses with fewer than 10 employees or those that are less than three years old, as well as church plans and governmental plans. The act also permits retirement plan service providers to offer automatic portability services to plan sponsors – transferring an employee’s low balance retirement accounts to a new plan when they switch employers. This change could be especially beneficial for lower-balance savers who often cash out their retirement plan savings rather than moving them over into another eligible plan.
- Expanded 401(k) plan access to more long-term, part-time workers. Currently, employers offering a 401(k) plan must permit plan participation for any employee with at least 500 hours of service a year in three consecutive years. The new act would reduce the three-year requirement to two years for plan years beginning in 2025. Employees will become eligible to participate in their 401(k) or 403(b) plan after no more than one year of full-time work (1,000+ hours) or two years of part-time work (500+ hours per year).
- Higher catch-up contribution limits and Roth tax treatment. If you’re age 50 or older, you’re allowed to make additional catch-up contributions to your retirement accounts. The catch-up contribution limit for employees age 50 and over is $7,500 in 2023. Beginning in 2024, SECURE 2.0 will also index the $1,000 IRA catch-up contribution limit to inflation each year. Additionally, starting in 2024, all catch-up contributions made to employer-sponsored plans will be taxed as Roth contributions for participants whose prior year’s wages are $145,000 or more (indexed to inflation). This means you’ll be required to pay up-front income taxes, but enjoy the benefit of tax-free distributions in retirement. Participants earning $145,000 or less (adjusted for inflation), will be exempt from this Roth requirement.
Beginning Jan 1, 2025, SECURE 2.0 will also permit those age 60-63 to contribute the greater of either $10,000 or 150% of their indexed regular catch-up contribution amount to a 401(k) or 403(b) plan.
- Allowable Roth matching contributions. Currently, SIMPLE and SEP IRAs are not allowed to accept Roth contributions from employees. Starting in 2023, a SIMPLE or SEP IRA will now be permitted to be designated as a Roth IRA. Another provision in the bill allows 401(k) and other plans to give you the option of having any employer-matching contributions put into a Roth 401(k) account. Matching contributions designated as Roth contributions, however, will not be excluded from your income.
- Expanded qualified charitable distributions (QCDs). Beginning in 2024, the current $100,000 limit for QCDs will be indexed to inflation. People who are age 70½ and older may also elect as part of their QCD limit a one-time gift up to $50,000 (adjusted annually for inflation) to fund either a Charitable Remainder Unitrust (CRUT), Charitable Remainder Annuity Trust (CRAT) or Charitable Gift Annuity (CGA). And as long as certain rules/requirements are met, QCDs can be counted toward satisfying your RMDs for the year.
- Required minimum distribution (RMD) changes. SECURE 2.0 raises the RMD age to 73 on Jan 1, 2023 and to 75 in 2033. Since this allows more time for your money to grow tax-deferred, your annual withdrawals may need to be larger. If you turned age 72 in 2022 or earlier, you’ll need to continue taking RMDs as scheduled. If you are turning 72 in 2023 and have already scheduled your withdrawal, you may want to consider updating your withdrawal plan.
Starting in 2024, Roth accounts in employer retirement plans – Roth 401(k) and 403(b) – will become exempt from RMD requirements. And the penalty for missing RMDs becomes less severe. Under the new Act, starting in 2023, the current 50% excise tax on any distribution shortfall (one of the harshest penalties in the entire tax code) will be reduced to 25%; and if the mistake is corrected in a timely manner, the penalty is further reduced to 10%.
- Permitted 401(k) matching contributions based on student loan payments. Starting in 2024, employers can elect to help younger workers start saving for retirement by matching student loan payments with contributions to their retirement account. This is intended to give workers an extra savings incentive (in the form of matching retirement contributions from their employer) for paying off their student debt.
- Rollovers of 529 Plan assets to Roth IRAs. Beginning in 2024, once a 529 plan account has been established for 15 years, its assets can be rolled over to a Roth IRA for the beneficiary. This rollover provision is subject to annual Roth IRA contribution limits and an aggregate lifetime limit of $35,000, so you may need to plan to move funds over multiple years. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution.
- National 401(k) registry. SECURE 2.0 directs the Department of Labor to create a national online searchable database (within a two-year period) that will enable employers to locate missing plan participants; and will allow plan participants to search for any pension or 401(k) plan funds they may have forgotten or overlooked.
These reflect just a handful of the 90+ provisions contained in SECURE 2.0. To learn more and/or to explore all the Act’s provisions CLICK HERE.
Keep in mind that while Congress passes legislation, it’s ultimately the IRS that’s responsible for interpreting and applying these rules – and we all know how convoluted the tax code can get. Therefore, we will continue monitoring all the changes from SECURE 2.0 that might impact your financial planning. As you consider these new opportunities to enhance your retirement savings, take time to consult with your advisor to assess where you stand today, to review the intricacies of the new law, and to discuss any potential changes that may benefit your future.
The information contained herein is for informational purposes only and should not be considered investment advice or a recommendation to buy, hold, or sell any types of securities. Financial markets are volatile and all types of investment vehicles, including “low-risk” strategies, involve investment risk, including the potential loss of principal. Past performance does not guarantee future results. For details on the professional designations displayed herein, including descriptions, minimum requirements, and ongoing education requirements, please visit www.signatureia.com/disclosures. Signature Investment Advisors, LLC (“SIA”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SIA. SIA is a subsidiary of SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, 310-712-2323, and its investment advisory services are offered independent of Royal Alliance Associates, Inc. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc.