In the past few years Congress has enacted significant changes to retirement savings plans and distribution options. The Setting Every Community Up for Retirement Enhancement (SECURE) Act that was signed into law at the end of 2019 included eliminating the age limit on making regular contributions to traditional and Roth IRAs, revising the age when required minimum distributions (RMD) from retirement plans must begin from 70½ to 72, and requiring beneficiaries of inherited IRAs to withdraw all funds within 10 years of the death of the original account holder thus eliminating the “stretch IRA” planning strategy.
The second major legislation related to retirement savings was enacted in December 2022 called SECURE 2.0 which includes provisions that impact employee contribution and withdrawal options, and other provisions that impact employer contributions.
Employee Contributions and Withdrawal Options: The provisions that impact employee contribution and withdrawal options include lower penalties for failure to take an RMD, pushing out the age when an RMD must be started from retirement plans, an RMD is no longer required to be taken from a Roth IRA 401(k) plan, and higher catch-up contributions to retirement plans for older workers.
The penalty for failure to take the RMD was reduced from 50% to 25% of the amount that was not withdrawn. If the RMD is missed from an IRA, an individual may be able to reduce the penalty to 10% if the deficiency is corrected in a timely manner and tax returns are refiled.
The SECURE 2.0 further raises the RMD starting age for retirement plans including IRAs, at two different times in the future: pushing it out to age 73 starting in 2023, and to age 75, starting in 2033. Therefore, individuals who turn 73 this year must take their first distribution no later than April 1, 2024. The distribution for subsequent years would need to be made by Dec. 31 of that year.
Starting in 2024, employer-sponsored Roth accounts such as the Roth 401(k), will no longer have required minimum distributions. This change aligns the withdrawal rules for employer-sponsored plans with those for the Roth IRA, which has no RMD.
Beginning on January 1, 2025, an individual between ages 60 and 63 will be able to contribute up to $10,000 as a catch-up contribution. Also, the maximum catch-up contribution amounts will be indexed for inflation going forward.
Employer Contributions: The provisions that impact employer contributions include requiring Roth catch up contributions of higher income employees, allowing matching and non-elective employer contributions to Roth accounts, permitting student loan payments to act like a salary deferral for employer matching contributions, providing updates to the automatic enrollment options for new 401(k) and 403(b) plans, and allowing a Roth version of a SEP and SIMPLE plan.
SECURE 2.0 requires that catch-up contributions are designated as Roth contributions for any plan participant whose wages exceed $145,000, effective for tax years after 2023. In addition, starting immediately employers can make matching and non-elective contributions to designated Roth accounts. The Roth retirement plan employer matching contributions will be included in the employee’s gross income for the year. Therefore, the employee will need to make estimated tax payments, or increase their income tax withholding related to the matching Roth contributions to avoid a surprise tax bill when filing.
The new law allows student loan payments to act like a salary deferral that can be matched by employer contributions. The borrower/employee may continue to pay off their student loan while at the same time their employer has the ability to make matching contributions to their retirement plan. The provision is effective starting in 2024.
SECURE 2.0 requires automatic enrollment for new 401(k) or 403(b) plans beginning in 2025. The initial default rate must be between 3% and 10%, including annual auto-escalation of 1%, up to at least 10% but not more than 15%. Automatic enrollment in a retirement plan is designed to make it easier for employees to participate. Employees who prefer not to participate can opt out.
Small employers may use a SEP IRA or SIMPLE plan to provide retirement saving options to their employees. Starting in 2023, the new law allows a Roth version of a SEP IRA or SIMPLE retirement plan that enables employees to make after-tax contributions to the plan, then any withdrawal of principal and income will be tax-free in the future.
If you want to discuss how SECURE 2.0 impacts your retirement planning or do a financial planning session, please reach out to me at George@Lydfordfinancial.com, or 602-510-7484