Secure Act 2.0

The latest round of retirement system legislation was just passed, and the SECURE 2.0 Act is now in effect. Here is a quick snapshot of the most notable changes:

 Required Minimum Distributions (RMDs) 

Beginning January 1, 2023, the age at which people must start taking required minimum distributions from pre-tax retirement accounts increased from 72 to 73. SECURE Act 2.0 also includes a provision to increase the starting age to 75 in 2033 (anyone born in 1960 or later). Please note: If you turned 72 in or before 2022 you are still required to take RMDs as scheduled.

Also starting in 2023, the penalty for not taking an RMD within the calendar year is reduced from a hefty 50% fee to 25% of the RMD amount not taken. If the account owner withdraws the RMD amount not taken in the proper year and submits a corrected tax return in a timely manner, the penalty drops to 10% of the RMD amount.

 Roth / After-Tax Contributions 

There are multiple updates to Roth IRA and 401(k)s:

• SIMPLE IRA plans and SEP IRA plans can now offer Roth options.

• Employers with 401(k) plans can now offer Roth matching contributions (previously only pre-tax was allowed). Please note that, if elected, matching contributions made to a Roth 401(k) Roth will count as taxable earned income to the employee.

• Required Minimum Distributions (RMDs) will no longer be required from Roth 401(k)s as of January 1, 2024.

 529 Plan Fund Transfers Into Roth IRAs 

If a 529 (college savings plan) account is funded for a single beneficiary for 15 or more years, up to $35,000 of the funds can be rolled over into a Roth IRA for the beneficiary. Beneficiaries must have earned income to be eligible, and rollovers are treated as a contribution toward the annual Roth IRA contribution limit ($6,500 in 2023).

 IRA Contribution Limits 

Beginning in 2024, the IRA contribution limits (currently $6,500 for those under age 50, and $7,500 for those ages 50+ in 2023) will be indexed to inflation. This means the contribution limit could increase annually, based on cost-of-living assessments tied to inflation. 

 Catch-Up Contributions 

Catch-up contributions currently can be made by individuals ages 50 and older, who can contribute an additional $1,000 to IRAs and $7,500 to an employer retirement plan (2023 limits). SECURE Act 2.0 increases the catch-up contribution amounts for individuals ages 60-63 years old beginning January 1, 2025, to $10,000 or 150% of the 50+ catch-up contribution amount, whichever amount is higher. Those with previous year income of $145,000 or less can make pre-tax catch-up contributions; those with prior year income over $145,000 will be required to make their catch-up contributions to a Roth (after-tax) account. 

 Automatic 401(k) Plan Enrollment 

Companies adopting new 401(k) and 403(b) plans will be required to automatically enroll eligible employees. Starting in 2025, eligible employees will be set up to automatically start deferring a minimum of 3% of their compensation, which will automatically increase by 1% per year up to a maximum of 15%.

SECURE Act 2.0 also introduces “automatic portability”, meaning smaller account balances (typically referring to balances <$5,000) can be transferred to a new employer’s plan rather than automatically cashed out when changing employers, as is currently the default.

 Student Loan Debt 

Beginning in 2024, employees making student loan payments are able to receive an employer “match” in a retirement account. This is intended to help employees save while paying off education loans.

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Please note that this information is intended to serve as a reference and guide; it is not intended to be used as tax advice or as a definitive source. Please feel free to get in touch with us or your CPA if you have any questions. As always, we are happy to work with you and/or your tax professional directly to address and advise on any specific questions pertaining to your personal circumstances.