In the final days of 2022, Congress passed a new set of retirement rules designed to make it easier to contribute to retirement plans and access those funds earmarked for retirement. The law is called SECURE 2.0, and it's a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019.
The sweeping legislation has dozens of significant provisions, so to help you see what changes may affect you, we broke the major provisions of the new law into effective dates for individuals and employer-sponsored plans.
Impact on Individuals
2023 New Distribution Rules:
RMD age will rise to 73 in 2023 (Section 107). By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). Starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. But if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.
Reduced penalty (Section 302). Also, starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake promptly, the penalty may drop to 10%.
Federally Declared Disaster Withdrawals (Section 331). Effective in 2021, as an extension of SECURE Act 1.0, section 331 permanently provides access to retirement funds in the event of a federally declared disaster. The rule allows distributions up to $22,000 from employer-sponsored retirement plans or IRAs. Distributions under this section are not subject to a tax penalty and are subject to gross income tax throughout 3 years.
2023 Revised Roth Rules:
SIMPLE and SEP (Section 601). From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.
2024 New Distribution Rules:
Emergency Access to funds (Section 115). Beginning in 2024 allows for one annual distribution of $1,000 from any tax-preferred retirement account for personal or family emergency expenses or an immediate financial need. This distribution will be free of the 10 percent tax penalty applied to early distributions. However, no additional distributions can be made under this exception, during a three-year period, unless the initial distribution has been repaid. Other emergency provisions exist for terminal illnesses (Section 326) and survivors of domestic abuse (Section 314).
2024 New Accumulation Rules:
Emergency Savings (Section 127). Beginning in 2024, employers may establish an emergency savings account plan for employees. Employers can implement auto-enrollment at no more than 3 percent of an employee’s salary and cap employee contributions at $2,500 or lower. Employees can take the first four withdrawals a year without being subject to fees or penalties. The provision provides employees with rollover options for their emergency savings accounts when they separate from service.
Student Loan Retirement Plan Matching (Section 110). In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans. Governmental employers are also permitted to make matching contributions.
2024 Revised Roth Rules:
529 to a Roth (Section 126). Starting in 2024, pending certain conditions, beneficiaries of a 529 education savings plan are permitted penalty-free rollovers into a Roth IRA. If your child gets a scholarship, goes to a less expensive school, or chooses not to enroll in school, the money can be repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit and cannot exceed a lifetime 529 rollover limit of $35,000. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are allowed under certain other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.
Employer Plan Required Roth Distribution’s Eliminated (Section 325). Beginning in 2024, the provision changes the rules for pre-death employer plan Roth distributions. The legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans. This provision aligns the rules for Roth 401(k)s and Roth 401(b)s with Roth IRA rules. However, this provision does not apply to required distributions for years prior to January 1, 2024.
2025 New Accumulation Rules:
Catch-Up Contributions (Section 109). Starting January 1, 2025, investors age 60 through age 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually.
Improved coverage for part-time workers (Section 125). Beginning in 2025, eligibility rules for long-term part-time workers will decrease from 3 consecutive years of service to 2 consecutive years of service with at least 500 hours of service each year. This provision also extends to 403(b) plans that are subject to ERISA.
Impact on Employer Retirement Plans
SECURE Act 2.0 contains many provisions that bring a large range of implications for plans of different sizes. The provisions outlined in this section (in addition to the provisions mentioned above) are limited to those we believe will have the greatest impact on employer retirement plans.
Support for Small Businesses (Section 102). In 2023, the law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.
Financial Incentives for Plan Enrollment (Section 113). Effective in 2023, employers can boost employee participation in workplace retirement plans by offering “de minimis” financial incentives. The cost of these incentives cannot be paid for with plan assets.
Retirement Plan Overpayments (Section 301). Retirement plan fiduciaries are granted the flexibility to not recoup overpayments mistakenly made to retirees. Those looking to recoup overpayments will now face limitations and protection put in place to safeguard retirees.
Optional treatment of employer matching (Section 604). Effective for 2023, participants of defined contribution plans can elect to receive employer-matching contributions as Roth or pr-tax contributions.
Federally Declared Disaster Withdrawals (Section 331). In addition to permanently providing access to retirement funds in the event of a federally declared disaster, section 331 changes the rules for participant loans. In the event of a federally declared disaster, employers are permitted to provide larger loan amounts and allow for additional repayment time.
Employee Plans Compliance Resolution System (Section 305). Section 305 expands the Employee Plans Compliance Resolution System (“EPCRS”) to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make required minimum distributions from the otherwise applicable excise tax.
Updated Limit for Mandatory Distributions (Section 304). Section 307 increases the limit for employer-initiated transfer of employees who have separated employment from $5,000 to $7,000. This is effective for distributions made in 2024.
Catch-up Contributions are Limited to Roth Tax (Section 603). This provision eliminates pre-tax catch-up contributions to qualified retirement plans, starting in 2024. All catch-up contributions will be subject to Roth tax treatment. However, an exception is provided for employees with compensation of $145,000 or less.
Automatic Enrollment (Section 101). Beginning in 2025, the Act requires employers of new plans to enroll eligible employees into workplace plans automatically. The initial auto-enrolled contribution limits are set at a minimum of 3 percent and a maximum of 10 percent. The amount is increased by 1 percent each year after until the contribution percentage reaches at least 10 percent but no more than 15 percent. Employees can choose to opt-out of the plan. The provision grants an exception for small businesses with 10 or fewer employees, businesses that have been in business for less than three years, church plans, and governmental plans.
Considerations and implementation
Plan amendment deadlines under the 2019 SECURE Act, the CARES Act and the Taxpayer Certainty and Disaster Relief Act of 2020 are updated to the SECURE 2.0 dates. Plans have until the last day of the plan year beginning on or after Jan. 1, 2025 (Jan. 1, 2027, for governmental plans) to adopt amendments made pursuant to SECURE 2.0, as long as the plan operates in compliance with the requirements of SECURE 2.0 amendments.
Remember that just because retirement rules have changed does not mean that adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changing another.
Retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It's not intended as a substitute for real-life advice. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.
Investment advisory services offered through RMR Wealth Builders, Inc. RMR Wealth Builders, Inc. is not engaged in the practice of law or accounting. The information in this material is not intended as tax or legal advice. All investment strategies have the potential for profit or loss.
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The content is developed from sources believed to be providing accurate information. A portion of this material was developed and produced by FMG Suite. FMG is not affiliated with RMR Wealth Builders, Inc.. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Additional Sources: https://www.finance.senate.gov/download/retirement-section-by-section-