Recent laws passed in Congress have brought major reforms to retirement savings plans and retirement eligibility guidelines. One of the most significant laws to be enacted has been the SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act. Passed in 2022 and made effective starting December 31, 2023, the SECURE 2.0 Act contains over 90 provisions that will be phased in over the next three years, focusing on retirement savings accounts, improved retirement guidelines, and business incentives for retirement plans. The SECURE 2.0 Act originates from the SECURE Act, enacted on December 20, 2019, and is part of a larger strategy to overhaul the current system of retirement plans. While the SECURE 2.0 Act encompasses a wide range of topics, we will highlight important sections that will most directly impact your retirement strategy.
We will first cover sections that address reforms to required minimum distributions (RMDs). An RMD is the annual minimum amount that you are obliged to withdraw from your retirement account.
Under section 107 of the SECURE 2.0 Act, while you previously would have to start taking RMDs at the age of 72, the starting age of the RMD will now be raised to 73 if you turn 72 between December 31, 2022, and Jan 1, 2033. The RMD starting age will be further raised to 75 in 2033 if you turn 74 any time after December 31, 2032.
Under section 302, for taxable years starting after December 31, 2022, you will only have to pay a 25% penalty in the form of an excise tax if you fail to collect your RMDs at all, compared to 50% previously. The penalty will be reduced from 25% to 10% for RMDs taken behind schedule.
Currently, while RMDs are not required before a Roth IRA owner passes away, owners with Roth-designated accounts under their employer retirement plan must still take out a distribution before their death. Section 325 will abolish this pre-death distribution requirement for Roth accounts in employer plans for taxable years after December 31, 2023.
We will next cover reforms to catch-up contribution limits, which set caps on how much you can contribute annually towards your IRA and 401(k) accounts.
Section 108 will address catch-up contribution limits for individuals 50 and older. Previously, limits on IRA contributions were increased by $1,000 once a person reached the age of 50. Effective for taxable years starting January 1, 2024, these limits will now be indexed to the individual’s cost-of-living adjustment.
Section 109 will take effect for taxable years starting after December 31, 2024. Current law stipulates catch-up limits of $7,500 for 401(k), 403(b), and 457 plan holders and $3,500 for SIMPLE IRA plan holders. Individuals with these plans can now contribute the greater of either $10,000 or 150% of the “standard” catch-up amount for a given year. Higher catch-up limits will be enforced for those aged 60 to 63.
Section 117 will address changes to how you can contribute to your SIMPLE IRA plan. Effective for taxable years after December 31, 2023, the limit for your elective deferral contributions will be increased from $14,000 to $15,400, and your catch-up limit will be increased from $3,000 to $3,300. In other words, you will now be able to contribute up to $3,300 annually to your SIMPLE IRA plan if you are 50 and older, and you can now choose to have up to $15,400 of your annual pre-tax income transferred to your SIMPLE IRA plan. For businesses employing 26 to 100 individuals, employers must provide either a 4% matching contribution or a 3% employer contribution to be able to provide higher deferral limits.
The SECURE 2.0 Act will also address issues accessing retirement funds.
Under section 115, you can withdraw up to $1,000 per year in a single payout for specific emergencies, which are defined as unpredicted or urgent financial situations related to personal or family expenses. You will not, however, need to pay the 10% early distribution penalty for each transaction. Distributions that are completed after December 31, 2023, qualify under this provision.
Under section 127, as a non-highly compensated employee, you will have the opportunity to establish a Roth emergency savings account linked to your pension. You can qualify as a non-highly compensated employee if you have not owned more than 5% of the business at any point in the preceding year or have not received more than $150,000 in compensation for the current tax year.
Your employer can automatically opt you into an emergency savings account. You will have no more than 3% of your salary included in your savings account, and any contributions you make are capped at $2,500 (or lower according to your employer). If you later choose to leave your workplace or transition into retirement, you can receive your emergency savings in cash. Additionally, you have the option to roll over your emergency savings account into either a Roth-defined contribution plan or an IRA account.
Section 314, effective for distributions made after December 31, 2023, will enable domestic violence survivors to withdraw the lesser of $10,000 or 50% from their or the other party’s retirement account. They will also be able to have three years to repay the withdrawn amount and will no longer need to pay the 10% fee for early distributions.
However, while the SECURE 2.0 Act changes the landscape for retirement plans, it does not address funding for the steadily shrinking Social Security Trust (SST), which will no longer fully cover eligible retirees within a decade from now, potentially leaving you without an adequate income from Social Security. We will discuss more on the SST in our next blog.
Despite these concerns, the SECURE 2.0 Act can potentially benefit owners of retirement savings plans. If you want to learn more about how the SECURE 2.0 Act may affect you, call us, submit a form through our website, or visit our office for a consultation. Together, we can guide you through the first steps toward building a secure retirement bedrock for you and your loved ones.
References: