In 2022, the Consolidated Appropriations Act, 2023 (CAA) was signed into law and includes the SECURE 2.0 Act of 2022. This new legislation enhances the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was passed in December 2019. The Act contains 92 new provisions to promote savings, boost incentives for businesses, improve retirement outcomes, and offer more flexibility to those saving for retirement.
The following provisions are effective immediately:
Penalty for Failure to Distribute Required Minimum Distribution (RMD):
The penalty for not taking an RMD reduces from 50% to 25%, and if it is corrected in a timely manner, the penalty is further reduced to 10% for RMDs due in 2022, as long as the necessary funds are taken by December 31, 2024. There is an exception to the 10% penalty for distributions made after December 29, 2022, for someone who has been certified by a physician with a terminal illness that can reasonably be expected to result in death in 84 months or less after that date of the physician’s certification.
Determining Contribution Limits:
Tax laws allow you to contribute to both a Roth IRA and an employer-sponsored retirement plan, such as 401(k), SEP, SIMPLE IRA, or SIMPLE plans. Although each type of plan has different contribution limits, Roth IRA contributions don’t count toward your employer-sponsored plan, but these contributions do count toward your total IRA limit. In addition, your modified adjusted gross income affects how much you can contribute to a Roth, and at certain income levels, the limits are reduced or eliminated.
2023
Employer Matching or Nonelective Contributions Considered Roth Contributions:
Employers are permitted to allow employees to treat employer matching or nonelective contributions to be made as Roth contributions. If the employee elects, the employer contributions would be taxable to the employee at the time they are made, and such contributions and related earnings are tax free when distributed. The matching and/or nonelective contributions must also be 100% vested as soon as they are made. This is effective for contributions made after December 29, 2022.
Required Minimum Distribution (RMD):
Beginning January 1, 2023, the required minimum distribution rules change, increasing the RMD starting age from 72 to 73, and then to age 75 beginning ten years later on January 1, 2033.
Larger 401(k)s Catch-Up Contributions:
Taxpayers 50 and older can contribute an additional $7,500 in 2023 (up from $6,500 in 2022).
Incentives for Businesses to Offer Qualified Retirement Plans:
The new rules increase the tax credit for the costs of starting retirement plans for small businesses. The credit increases from 50% to 100% for employers with up to 50 employees. The credit phases out for employers with 51 to 100 employees (The applicable percentage is 100 percent in the first and second years, 75 percent in the third year, 50 percent in the fourth year, 25 percent in the fifth year – and no credit for tax years thereafter). An additional credit can be taken for employer contributions up to a per-employee cap of $1,000. This change is effective for taxable years beginning after December 31, 2022.
Military Spouse Retirement Plan Eligibility Credit:
In addition, a new tax credit for eligible small businesses that employ military spouses allows them to participate in their plan subject to special eligibility and vesting requirements. The tax credit equals the sum of (1) $200 per military spouse, and (2) 100 percent of all employer contributions (up to $300) made on behalf of the military spouse, for a maximum tax credit of $500. This credit applies for three years with respect to each military spouse and does not apply to highly compensated employees. This change is effective for taxable years beginning after December 31, 2022.
Financial Incentives for Contributing to a Retirement Plan:
Employers can offer small, immediate financial incentives such as a small dollar amount gift card if an employee contributes to a 401(k) or 403(b) plan. The incentives cannot be paid by the plan assets.
2024
Indexing IRA Catch-Up Limits:
People currently 50 years and older can make catch-up contributions of $1,000 per year to their IRA. Beginning in 2024, the catch-up contributions will be indexed for inflation on an annual basis.
SIMPLE Plan Updates:
Beginning in 2024, employers can make nonelective contributions up to 10% of compensation, not to exceed $5,000 (indexed for inflation) to a SIMPLE IRA plan or a SIMPLE 401(k) plan. Currently employers with SIMPLE plans are allowed to make employer contributions to employees of either 2% of compensation or matching employee elective deferral contributions up to 3% of compensation.
Matching of Student Loan Payments:
Paying off school debt often deters people from contributing to a retirement plan. The SECURE 2.0 Act allows your employer to make matching contributions to your retirement plan account based on your student loan payment amount. This becomes effective in 2024.
Emergency Personal Expense Distributions:
New laws allow for an early “emergency” distribution from your retirement account to cover unforeseeable or immediate financial needs. A distribution of up to $1,000 can be taken only once during the year and will not be subject to the usual 10% tax for early withdrawals. If you don’t repay the distribution within a certain time, you will not be allowed to take another emergency distribution for three years. This is effective for distributions made after December 31, 2023.
Pension-Linked Emergency Savings Account (PLESA):
Employers can offer PLESA accounts to non-highly compensated employees as an emergency savings account to pay for unpredicted short-term emergency expenses. Employers can specify a lower amount, but up to $2,500 (indexed for inflation after 2024) can be put into this Roth-IRA-type account by employees who meet the age and service requirement and participate in either a 401(k), 403(b), or 457(b) plan. Contributions cannot be more than 3% of their yearly compensation. Withdrawals can be made monthly, and the first four cannot be subject to fees.
Note that if a contribution to a PLESA account causes it to exceed the lesser of $2,500 (as indexed for inflation after 2024), the participant may elect to put it into another employee retirement plan account or the excess will be distributed to the participant.
529 Plan Funds and Roth IRAs:
Beginning in 2024, if you have a 529 plan that has been held for 15 years, the funds can be moved to a Roth IRA, but the fund must have the same beneficiary as the 529 plan. The conversion limit is still subject to the annual Roth IRA contribution limits and must be made in place of an annual Roth contribution, not in addition to it. There is also a lifetime cap of $35,000 per beneficiary. Also, contributions, including earnings within the last five years, are not eligible to rollover. The Roth IRA owner must also have taxable income at least equal to the amount of the rollover, and the rollover is not limited based on the taxpayer’s adjusted gross income.
Rolling it over to a Roth IRA allows for future tax-free distribution of the funds. It also provides peace of mind for those concerned with overfunding and opportunities for higher-net-worth individuals to leave a retirement fund for their children, grandchildren, and other loved ones.
2025
Higher Catch-Up Contribution Limits:
Retirement savers can make catch-up contributions to their retirement plans up to certain limits beginning in 2025. Contributions can be made to the greater of $10,000 or 150% more than the regular catch-up amount for that year if you are 60, 61, 62, or 63 years old. These amounts will also be indexed beginning in 2026 for inflation.
Automatic Enrollment for New Plans:
Beginning in 2025, automatic enrollment into 401(k) and 403(b) plans will be required by employers, unless the employee opts out of the enrollment, rather than opt in, which has been the standard practice. Once an employee is eligible to participate, the automatic enrollment percentage cannot be less than 3% of their salary, and no more than 10%. An annual increase of 1% is allowed to reach 10%, but no more than 15%. All current plans are grandfathered into this new provision, with exceptions to church and governmental plans, small businesses with 10 or fewer employees, and new businesses operating less than three years.
2026
Long-Term Care Contracts:
If a retirement distribution is used after December 29, 2025, to pay for a long-term care contract premium, the 10% early distribution tax will not be applicable. The amount available to use is equal to $2,500 (indexed for inflation after 2024) of distributions for the payment of premiums on certain long-term care insurance contracts for the taxpayer or their spouse. The policy must provide high-quality coverage, and the distribution is limited to 10% of the participant’s vested account balance.
Higher Earners: For those earning over $145,000, beginning in 2026, any and all catch-up contributions made to a 401(k) or other employer-sponsored retirement plans must be deposited in an after-tax Roth account. This was originally slated to begin in 2024 but is postponed until 2026 due to the new two-year administrative transition period.
2027
Saver’s Match:
Beginning in 2027, the current Retirement Savings Contribution Saver’s Credit changes into a government matching program or the Saver’s Match program. The Saver’s Credit is applied against an eligible taxpayer’s tax liability when they file their tax return as a credit. Under the new Saver’s Match, the federal government will deposit a matching contribution (Saver’s Match) into the taxpayer’s eligible retirement account of their choice with the exception of a Roth IRA. The match is 50% of IRA or retirement plan contributions up to $2,000 per individual. 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 head of household filers.
Please contact Kakenmaster & Associates with any questions regarding these new tax laws contained in the SECURE Act 2.0.