Summary of Highlights from the New Law
The end of the year brought lots of changes to retirement planning. On December 29, 2022, the “Consolidated Appropriations Act, 2023” was signed into law. It includes the Secure 2.0 Act of 2022, which is follow-up legislation to the SECURE Act that became law at the end of 2019. Combined, they include sweeping changes to retirement planning, in an effort to help individuals save more for their retirements.
Here are some of the highlights from Secure 2.0. As the effective date for each provision varies, we have organized them by the year that they become effective.
Starting in 2023
- RMD Age Increases: Starting in 2023, required minimum distributions (RMDs) must begin at age 73 (formerly age 72) and starting in 2033, the age rises to 75. This does not affect those who have already reached their RMD age.
- Reduced Penalties for missed RMDs: Starting in 2023, the excise tax for missing an RMD decreases from 50% to 25%. This reduces further to 10% if the distribution is taken by the following year end.
- Employer Roth Contributions Allowed: Starting immediately, employees may elect to have employer matching or non-elective contributions made on a Roth basis, assuming the plan permits this and the participant is fully vested. Prior to this rule, all employer contributions have been on a pre-tax basis.
- Penalty-Free Emergency Withdrawals: For those below age 59 ½, a 10% early distribution penalty is imposed when funds are withdrawn from a retirement account, with a few exceptions. Those exceptions have now been expanded and plan administrators can rely on an employee’s self-certification that they qualify.
- Starting immediately, penalty-free withdrawals from IRAs and retirement plans are allowed in the case of terminal illnesses.
- Effective for qualified federally declared disasters occurring after January 26, 2021, permanent special rules were created for penalty-free distributions when certain conditions are met.
- Effective in 2024, emergency withdrawals of $1,000 per year can avoid the 10% penalty. This distribution can be repaid within 3 years, with certain restrictions
- Also effective in 2024, withdrawals of up to $10,000 for survivors of domestic abuse qualify for the 10% penalty exception, subject to certain rules.
- Tax Credits for Small Businesses: Starting in 2023, eligible businesses can qualify for a credit of 100% of the administrative costs, up to $5,000, for starting a new retirement plan.
- Qualified Charitable Distribution (QCD) Update: Starting in 2023, QCDs are allowed a one-time election of up to $50,000 to charitable remainder unitrusts, charitable remainder annuity trusts or charitable gift annuities. The other QCD rules remain in place, including the qualifying age requirement of 70 ½ and older and the $100,000 annual limit for gifts to qualified charities. Starting in 2024, the $50,000 and $100,000 amounts are indexed for inflation.
- SEP & SIMPLE ROTH IRAs: Starting in 2023, the ROTH SEP and ROTH SIMPLE IRA have now been created.
Starting in 2024
- No Mandatory RMDs for Roth 401(k) Accounts: Starting in 2024, the plan participant is no longer required to take a distribution during the participant’s lifetime from Roth 401(k), 403(b) or government 457(b) plans. The RMD rules are still applicable for inherited Roth Accounts.
- Catch-Up Contributions Modified: Starting in 2024, catch-up contributions must be made on a Roth basis, if the employee’s compensation from the company the prior year exceeded $145,000 (indexed for inflation). This does not apply to SIMPLE IRAs or SEP plans.
- IRA Catch-Up Limit: Starting in 2024, extra contributions to IRAs, for those age 50 and older, will be indexed for inflation.
- Employers May Match Student Loan Payments: Starting in 2024, employers are permitted to make matching contributions to 401(k), 403(b) and 457(b) plans when the employee makes certain qualified higher education loan repayments. These student loan matching contributions may be designated as Roth contributions.
- Leftover 529 Funds to Roth IRAs: Starting in 2024, unused 529 balances (college savings plans) can be rolled into a Roth IRA for the beneficiary. The 529 must have been in place for a minimum of 15 years and there is a $35,000 lifetime limit for each beneficiary. These contributions are subject to the annual Roth contribution limits and rules.
- Emergency Savings Accounts (ESAs): Starting in 2024, defined contributions plans can offer non-highly compensated participants the option of contributing up to $2,500 to an ESA, via a Roth contribution. The purpose is to create a savings account that assists individuals with saving for future emergencies.
- Additional SIMPLE Plan Contributions: Starting in 2024, contributions limits are increased, subject to certain restrictions.
Starting in 2025
- Higher Catch-Up Contributions: Starting in 2025, a plan participant age 60-63 can make catch-up contributions equal to the greater of $10,000 or 150% of the regular catch-up limit. This amount is indexed for inflation.
- Auto Enrollment Expansion: All new 401(k) and 403(b) plans established after December 31, 2024 must automatically enroll eligible participants, who don’t opt out, with a default contribution between 3-10%, and an annual automatic escalation feature of 1% each year until the employee reaches at least 10%, but no more than 15%. Some exclusions apply.
- Creation of a National 401(k) Registry: The DOL is to create a “Lost and Found” for plan participants and beneficiaries to be able to find missing or forgotten qualified retirement plans. This should be completed by 2025.
Starting in 2026
- Age of Eligibility Increases for ABLE Accounts: ABLE Accounts are a tax-favored savings program intended to benefit disabled individuals. It was named after the Achieving a Better Life Experience (ABLE) Act of 2014. Eligibility had been limited to individuals who became blind or disabled prior to age 26. Starting in 2026, the eligibility age increases from 26 to 46.
Starting in 2027
- Saver’s Tax Credit Update: The Saver’s Tax Credit was created in 2001 as in incentive for lower income earners to save up to $2,000 per year. This credit currently exists for those who don’t exceed certain income requirements. The government is committed to increase public awareness of this credit and starting in 2027, a federal matching program will deposit funds into Saver’s Retirement Accounts.
We will continue to analyze these new regulations as well as the additional provisions not summarized here. We will share with you the planning opportunities that they present. If you have any questions, please don’t hesitate to ask.