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Secure Act 2.0 - Tax & retirement changes

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Before closing out 2022, President Biden signed into law the SECURE 2.0 Act of 2022 (SECURE 2.0), a retirement and tax package, included as part of the $1.7 trillion year-end omnibus spending bill known as the Consolidated Appropriations Act of 2023.

SECURE 2.0 builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The 2019 Act ushered in many retirement and tax planning changes, including the elimination of the Stretch IRA. The elimination of the Stretch IRA changed the retirement planning landscape by no longer allowing a non-spouse beneficiary of an IRA account to take distributions from the inherited account over their lifetime. Instead, most adult non-spouse beneficiaries must fully withdraw all the funds from an inherited IRA within 10 years after the death of the original owner (with limited exceptions).

SECURE 2.0 builds on the 2019 Act through a multitude of retirement and tax provision changes intending to increase access to retirement plans and retirement savings and preserving retirement income. Many of the changes do not take effect until 2024 or 2025, but some changes do take effect in 2023.

In the following sections, we summarize some of the more relevant and impactful provisions of SECURE 2.0 that may affect individual retirement savers, employees and/or employers:

Increasing the Starting Age for Required Minimum Distributions (RMDs)

 SECURE 2.0 increases the starting age for RMDs as follows:

  • Increases the age from 72 to 73 for tax years starting January 1, 2023.
  • Further increases the age to 75 for tax years starting January 1, 2033.

Changes to Catch-Up Contributions

 Individual Retirement Accounts Now Indexed for Inflation

The current catch-up contribution limit of $1,000 for individuals aged 50 and older has been in place, unchanged, for over 15 years. Starting in 2024, the catch-up limit will be indexed for inflation on an annual basis.

 Higher Limits for Employer Retirement Plan Participants in Their Early 60s

Starting in 2025, SECURE 2.0 increases the catch-up contribution limits for participants in employer retirement plans (i.e., 401(k), etc.) who are aged 60 through 63. If you reach those specified ages after 2025, your catch-up contribution limit will be the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the normal 2024 inflation-adjusted catch-up contribution limit (2025 for SIMPLE plans).

Roth IRA and Roth Retirement Plan Changes

SECURE 2.0 includes a significant number of Roth-related changes and additions. Among other things, these measures encourage (or require, in some situations) after-tax contributions or taxable conversions to Roth IRAs, Roth 401(k)s, Roth 403(b)s, etc.

Some of the more significant Roth changes and additions include:

No RMDs for Retirement Plan Roth Accounts

Beginning in 2024, SECURE 2.0 eliminates the requirement for RMDs from Roth accounts in employer retirement plans. This aligns Roth retirement plan accounts with Roth IRA accounts which currently do not require RMDs.

Employer Contributions to Roth Accounts

Effective immediately, employees may elect that some or all matching or non-elective employer contributions be directed to Roth plan accounts. These contributions are included in the employee’s income and may only be made if the contributions are fully vested at the time they are made.

Mandatory Roth Catch-Up Contributions in Employer Retirement Plans

Starting in 2024, employees with prior year wages of more than $145,000 must make any eligible catch-up contributions for a 401(k), 403(b), or 457(b) plan to a Roth account under the plan. As a result, the contribution will be included in the employee’s income.

Important: It appears that, beginning in 2024, if an employee must make his or her catch-up contribution to a Roth account and the plan does not offer a Roth equivalent, no eligible participants in the plan may make catch-up contributions to the employer plan (Roth or otherwise).

529 Plan to Roth IRA Transfers

Under SECURE 2.0, the owner of a 529 education savings plan may make a tax-free and penalty-free transfer to a Roth IRA in the name of and for the benefit of the 529 plan beneficiary. There are several conditions and limitations such as:

  • Rollovers are subject to Roth IRA annual contribution limits
  • The 529 Plan must have been in existence for at least 15 years, but 529 plan contributions in the last 5 years are not eligible for rollover
  • A maximum lifetime rollover of $35,000 from the 529 plan to a Roth IRA for the beneficiary
  • The beneficiary must have earned income at least equivalent to the amount of the rollover 

Other Selected SECURE 2.0 Provisions

  • Surviving Spouse Beneficiary Options: A surviving spouse who is a beneficiary of a deceased spouse’s retirement account may elect to be treated as the deceased employee in determining future RMDs.
  • Expanded Flexibility for Qualified Charitable Distributions (QCDs) from an IRA: SECURE 2.0 provides a one-time option to fund a Charitable Remainder Trust or a Charitable Gift Annuity (CGA) with a distribution from an IRA. This election is limited to $50,000 and includes many other restrictions and conditions for proper creation and funding.
  • QCDs will be Inflation-Indexed Starting in 2024
  • Ability to Provide SEP IRA for a Domestic Employee (Nannies, Housekeepers, etc.)
  • Auto-Enrollment for New 401(k) and 403(b) Plans: Beginning in 2025, employees must be automatically enrolled (with some exceptions) in a 401(k) or 403(b) plan created after the date of SECURE 2.0’s enactment. The employer must initially withhold at least 3% of compensation. This withholding must increase by 1% each following year until reaching at least 10% of compensation. Employees may opt out of this requirement. Current plans are grandfathered.
  • Matching Contributions for Student Loan Payments: Starting in 2024, employers may make a matching contribution to a 401(k), 403(b), or 457(b) plan based on an employee’s student loan payments.
  • Emergency Savings Accounts Tied to Retirement Plans: In 2024 and beyond, employer retirement plans may allow the creation of “emergency savings accounts” for employees (not “highly-compensated”) within existing retirement plans such as a 401(k) or 403(b). Contributions are eligible for an employer match and the balance may not exceed $2,500.
  • Expanded Access to Retirement Savings for Hardships and Life Needs: SECURE 2.0 greatly expands upon the situations (disasters, emergencies) and persons (terminally ill, victims of domestic abuse, first responders, disabled) that are eligible for penalty-free withdrawals from retirement plans. Many requirements, limitations, and conditions apply.
  • Reduction in Excise Tax on Failure to Take Required Minimum Distributions (RMDs): SECURE 2.0 reduces the penalty for failure to take RMDs from 50 to 25 percent. Further, if a failure is corrected in a “timely manner” the excise tax is reduced further to 10 percent. This is effective starting in 2023.

Conclusion

We touched on only a selected portion of the new provisions in the over 4,000-page bill that includes the SECURE 2.0 Act. Individual savers, employees, employers and others affected by SECURE 2.0 should consult with their professional advisors to ensure proper compliance and tax planning.

WMS advisors are available to speak to our clients about the planning opportunities, strategies, and challenges that may arise as a result of the passage of SECURE 2.0.

 

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