The $1.66 trillion Consolidated Appropriations Act, 2023, was signed into law on December 29, 2022, by President Biden. Included in the 4,155-page bill is the SECURE Act 2.0 of 2022, which contains a number of tax provisions relating to retirement.
Let’s take a look at the highlights:
AUTOMATIC ENROLLMENT IN RETIREMENT PLANS
Employers starting new retirement plans in tax year 2025 or later would be required to automatically enroll their employees in 401(k) and 403(b) plans. Employees would set aside not less than 3 percent but not more than 10 percent of their paycheck. There would be an automatic one percent increase yearly until the employee participant reaches 10 percent. Employees can set aside as much as 15 percent. The new tax provision doesn’t apply to businesses in existence for less than three years. Furthermore, existing businesses with retirement plans already in place, employers with fewer than ten employees, and church and government plans are exempt from the new law.
Starter 401k Plans. For tax years after December 31, 2023, the new law allows employers with no retirement plans to establish starter 401k plans. Workers would be enrolled automatically, contributing at least 3 percent. Catch-up contributions are allowed for workers aged 50 and up.
FEDERAL MATCH FOR SAVER’S CREDIT
Starting in 2027, lower to middle-income taxpayers contributing to a traditional IRA or a 401(k) at their workplace would be eligible for a 50 percent matching contribution of up to $2,000 from the federal government. The federal matching contribution will be directly deposited into their IRS or 401(k) account. Savers must be 18 or older and contribute more than $100 to receive the match. Dependents, full-time students, and nonresident aliens (unless treated taxable as a resident) are not eligible. The match phases out between $41,000 and $71,000 for joint filers, $20,500 to $35,500 for single filers, and $30,750 to $53,250 for heads of households.
EMERGENCY SAVINGS FUNDS AND 401K WITHDRAWALS
Emergency Savings Plans. Employers can now set up emergency savings plans for employees linked to their retirement accounts. Employees would be allowed to contribute 3 percent of their salary or a maximum of $2,500 to the emergency account, which will be a Roth account and is not subject to the 10 percent additional tax for early withdrawals.
401k Withdrawals for Emergency Personal Expenses. Another option employers can offer is a one-time penalty-free withdrawal from their employees’ 401k plans. Employees would be permitted one (1) distribution per calendar year for a maximum amount of $1,000. This tax provision will go into effect in 2024.
Penalty-free Retirement Plan Withdrawals. Starting in 2024, domestic abuse victims, individuals with terminal illness, and individuals taking distributions in connection with qualified disasters are no longer subject to the 10 percent additional tax on early withdrawals.
STUDENT LOAN PAYMENTS COUNT AS RETIREMENT CONTRIBUTIONS
Starting in 2024, employees that make student loan payments to loan servicers qualify for matching contributions from their employer to a retirement plan – even if the employees do not make contributions of their own.
Starting in 2025, part-time workers are eligible to participate in their employer’s 401(k) retirement plans after two years instead of three (SECURE Act 2.0, 2019). Each 12-month period for which the employee has more than 500 hours of service shall be treated as a year of service.
IRA CATCH-UP CONTRIBUTIONS
Indexed to inflation. For taxable years beginning after December 31, 2023, the $1,000 catch-up contribution amount will be indexed to inflation with the amounts rounded down to the nearest multiple of $100.
Higher catch-up contributions. Starting in taxable years after December 31, 2024, catch-up contributions for workers aged 60, 61, 62, and 63 increase to $10,000 or 150 percent of the regular catch-up amount that year, whichever is greater. Cost of living adjustments will be in effect for years after December 31, 2024.
REQUIRED MINIMUM DISTRIBUTIONS (RMDS) INCREASE TO AGE 73
For individuals who reach age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age for starting RMDS is 73. For individuals who attain age 74 after December 31, 2032, the applicable age is 75. The new rules apply to distributions required to be made after December 31, 2022, for individuals who attain age 72 after such date.
To summarize: Taxpayers born between 1951 and 1959 will begin RMDs at age 73. Those born in 1960 or later will begin taking RMDs at age 75.
New Rules for Roth 401ks. Effective January 1, 2023, employers can let employees choose between having a company match in a Roth 401k or a regular 401k. Under current law, employer matching contributions must go into a regular 401k even if taxpayers put money in their Roth 401k.
Elimination of RMDs for Roth 401ks. Starting in 2024, RMDs are eliminated for Roth accounts in qualified employer plans. While Roth IRAs are not subject to RMDS, Roth 401ks are subject to RMD rules, i.e., distributions must be taken at age 72 (although they are tax-free).
Catch-up Contributions for Higher Earners. Starting in 2024, catch-up contributions for workers aged 50 and up who earn more than $145,000 must be put into a Roth retirement account rather than a traditional pretax retirement account such as a 401k. The $145,000 threshold amount will be indexed for inflation starting in 2025 and rounded down to the lowest multiple of $5,000. Distributions will generally be excluded from income.
Special Rules for 529 rollovers. Starting in 2024, 529 college savings plans maintained for at least 15 years can be rolled over to a Roth IRA. Any contributions (and earnings on those contributions) to the 529 plan made within the last 5 years are not eligible. The rollover must be trustee to trustee, and there is a $35,000 lifetime limit per account beneficiary. Rollovers are subject to Roth IRA annual contribution limits.
NEW RULES FOR QUALIFIED CHARITABLE DISTRIBUTIONS (QCDS)
The maximum annual amount (currently $100,000) an individual donor can contribute per calendar year is indexed to inflation starting in 2024. As a reminder, QCDs are a direct distribution from an IRA to a qualified charity and count toward satisfying required minimum distributions (RMDs) for the year, as long as certain rules are met.
HELP IS JUST A PHONE CALL AWAY
If you have questions about any tax provisions in the SECURE 2.0 Act of 2022, or any other tax-related topic, do not hesitate to contact the office.