Key Provisions of the SECURE 2.0 Act
January 4, 2023
These provisions will phase in over several years. For example, the law permits a beneficiary of a 529 college savings account to make direct rollovers from a 529 account in his or her name to a Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete. The 529 account must have been open for more than 15 years and other rules apply. The provision is effective for distributions beginning in 2024.
To incentivize small businesses to establish retirement plans, the new law creates or enhances some tax credits. For example, it increases the startup credit from 50% to 100% of administrative costs for employers with up to 50 employees. An additional credit is available for some non-defined benefit plans, based on a percentage of the amount the employer contributes, up to $1,000 per employee. Employers who start new retirement plans will be required to automatically enroll employees in their retirement plan at a rate of at least 3% but not more than 10%, beginning in 2025. Excluded from this requirement are new companies in business for less than 3 years and businesses with 10 or fewer workers. If you have a small business, talk to us about how these provisions may affect you.
Achieving a Better Life Experience (ABLE) Accounts
The new SECURE 2.0 law makes a favorable change to Achieving a Better Life Experience (ABLE) accounts, although it doesn’t kick in for a few years. Tax-exempt ABLE programs are established by states to help individuals with disabilities. Before the new law, in order to be the beneficiary of an ABLE account, an individual’s disability or blindness must have occurred before age 26. SECURE 2.0 increases this age limit to 46, which will make more people eligible to benefit from ABLE accounts. This provision is effective for tax years beginning after Dec. 31, 2025.
Student Loan Debt
Employees paying student loan debt may benefit significantly from a provision of the new SECURE 2.0 law. Beginning after 2023, employers will be allowed to make matching contributions to 401(k) accounts (and certain other retirement plans) with respect to “qualified student loan payments.” This is true even for taxpayers who aren’t contributing to their own accounts. The purpose of the provision is to allow employees who can’t afford to save for retirement while they’re paying off their student loan debt to do both simultaneously. For example, the employer of an employee who pays $1,200 towards his or her student debt could contribute $1,200 to the employee’s 401(k) account.
Required Minimum Distributions
Among the many provisions in the SECURE 2.0 Act is an increase in the age to begin taking required minimum distributions (RMDs). Employer-sponsored qualified retirement plans, traditional IRAs and individual retirement annuities are subject to RMD rules. They require that benefits be distributed or begin being distributed by the required start date. Under the new law, the required age used to determine distributions increases from 72 to age 73 starting on Jan. 1, 2023. It will then increase to age 75 starting on Jan. 1, 2033. In addition, the penalty for not taking an RMD is reduced from 50%, currently, to 25%, and in some cases to 10%. We’ll also see, beginning in 2024, the pre-death required minimum distribution requirement for Roth 401(k) accounts eliminated.
The allowance of larger “catch-up” contributions to certain retirement plans has also been released as part of SECURE 2.0. Defined contribution retirement plans are permitted, but not required, to allow participants age 50 or older to make additional catch-up contributions. For 2023, the 401(k) plan catch-up contribution amount is $7,500 and the SIMPLE plan amount is $3,500. Starting in 2025, the new law increases the catch-up limit for individuals who are ages 60 through 63 to the greater of $10,000 for 401(k)s and $5,000 for SIMPLE plans or 50% more than the regular catch-up amount. The increased amounts are indexed for inflation beginning in 2026. Lastly, effective January 1, 2024, all catch-up contributions for participants earning more than $145,000, will have to be made on a Roth basis.
Long-term, Part-time Employees
The SECURE Act required that long-term, part-employees (those who worked between 500 and 999 hours for three consecutive years) be eligible to participate in their company’s retirement plan. Under the new law, that requirement is reduced to two years in 2025.
Under the new law, plan participants generally will be able to withdraw up to $1,000 per year from their retirement savings account for emergency expenses without having to pay the 10% tax penalty for early withdrawal if they’re under age 59½. In addition, companies could allow employees to set up an emergency savings account through automatic payroll deductions. These contributions would be limited to $2,500.
Beginning in 2027, low to middle income employees will be eligible for a federal matching contribution of up to $2,000 per year that must be deposited into their retirement savings account. The match phases out based on income and tax-filing status. This match replaces the current Saver’s Credit.
Meet the Expert
Chris Powers, CPA
Chris helps her clients confidently navigate tricky tax laws and complex regulatory challenges.
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