Secure Act 2.0 Tax Law Changes You Should Know About
Congress passed the SECURE 2.0 Act as part of a year-end spending bill. This retirement plan legislation is an expanded version of the SECURE Act of 2019, which aims to improve savings account retirement laws.
The SECURE 2.0 Act is a follow-up to the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act. It was oart of the Consolidated Appropriations Act of 2023, which was passed by Congress on December 23. Six days later, President Biden signed the legislation into law.
The highlights include raising the age at which retirees should begin taking RMDs from 401(k) and IRA accounts and changes to the size of catch up contributions for workers with workplace plans.
1. Restrictions on High-Earners’ Catch-up Contributions:
People over 50 who wish to make catch-up contributions and earn more than $145,000 must make Roth contributions.
Employees earning less than $145.000 per year can make a pre-tax or Roth contribution. As permitted by their strategy. The implementation date for this change is January 1, 2024.
2. Ages 60-63 will have a higher catch-up limit:
Defined contribution retirement plans under Section 401(k) and Section 457(b) may, but are not required, allow people aged 50 and up to make additional pre-tax elective deferrals known as “catch-up” contributions.
3. Optional treatment of Employer Matching or Nonelective Contribution as Roth Contributions:
A participant may designate some or all matching contributions and nonelective contributions to a 401(a) qualified plan, a 403(b) plan, or a governmental 457(b) plan as designated Roth Contributions. This provision applies to contributions made after the Act’s enactment.
4. Rollovers from 529 plans to Roth IRAs are tax-free.
Beneficiaries of 529 college savings accounts can transfer funds directly from a 529 account in their name to a Roth IRA without incurring any tax or penalty. The 529 accounts must:
-Have been open for at least 15 years.
– The rollover amount cannot exceed the total amount contributed to the account more than five years prior to the rollover.
-The total amount of rollovers allowed under the provision cannot exceed $35,000 over the beneficiary’s lifetime.
5. Student Loan Payments:
Employers can make “qualified student loan payments,” as well as matching contributions to a 401(k), 403(b), or SIMPLE IRA. It is intended to help employees who are unable to save for retirement due to student debt and are missing out on matching contributions as a result of repaying their student loans.
The vesting and matching schedules must be the same as they would be if the loan payments were salary deferrals.
6. Financial Incentives in 401(k) Plans
Small Financial Incentives to Contribute to a Retirement Plan: The Secure 2.0 Act allows your employer to provide small financial incentives (e.g., low-dollar gift cards) to increase employee participation in a workplace retirement plan. This provision will take effect for plan years beginning after December 20, 2022.
7. Withdrawals without Penalty for Certain Emergency Expenses
The Act also exempts certain unforeseeable or immediate personal or family emergency expenses from the 10% penalty tax on distributions from tax-favored retirement accounts. Only one distribution of up to $1000 per year is permitted, with the option to repay the distribution within three years.
8. Student Loans and 401(k)
Employer Fund Match for Student Loan Payments: Under the SECURE 2.0 Act of 2022, your employer may match your student loan payment amount in your retirement plan account. This is intended to address the issue of how student loan debt can prevent people from saving for retirement. This will take effect in 2024.
9. Qualified charitable distributions (QCDs)
Beginning in 2023, people aged 7012 and up may make a one-time gift for about $50,000, adjusted annually for inflation, to a a charitable remainder annuity trust, charitable remainder untrust, , or a charitable gift annuity as their QCD limit. This is an expansion of the types of charities that can receive QCDs. This amount is deducted from your annual RMD, if applicable. To be eligible, gifts must be made directly from your IRA account by the end of the year.
10. Increasing coverage for part-time employees
401(k) plans must generally allow an employee to make elective deferrals for plan years beginning in 2021.
If the employee has worked at least 500 hours per year with the employer for at least three consecutive years and has met the minimum age requirement by the end of the three consecutive year period. As a result, a long-term, part-time employee may not be barred from the plan simply because they have not completed a year of service.
While SECURE 2.0 makes it easier to save for retirement, everyone’s financial situation is unique. As always, consult with a tax professional to determine how the SECURE 2.0 changes affect you.