What is SECURE 2.0?
It is a range of retirement provisions included in the $1.7 trillion government spending bill for 2023, which was released on December 20. Secure 20 is built on and expands the Setting Every Community Up for Retirement Enhancement Act (SECURE) Act of 2019 to improve retirement savings accounts. The goal of SECURE 2.0 is to get people to save more for retirement, improve retirement rules, and lower the employer cost of setting up a retirement plan.
What are the major provisions?
Retirement Minimum Distribution (RMD)
- While the SECURE Act of 2019 raised the age at which people were required to start withdrawing money from their retirement accounts to age 72, from 70 ½. The new Score 2.0 legislation would raise that age again—to 73 beginning Jan. 1, 2023, and to 75 starting on Jan. 1, 2033.
- An additional RMD change: The penalty for missing RMD’s is being reduced from 50% of the withdrawal amount to 25%. It falls to 10% if the RMD is corrected in a timely manner
- Roth accounts in employer’s retirement plans will be exempt from RMD requirements starting in 2024.
401(k) Automatic Enrollment
- The legislation requires employers starting new retirement plans in 2025 or after to automatically enroll their employees in a 401(k) and 403(b) plan at a contribution rate of at least 3% but no more than 10 % during the participants first year of service, unless the employee elects otherwise. Each year, the contribution will automatically increase by 1%, unless employee elects otherwise. That mandate would not apply to select employers, including those with 10 or fewer workers, as well as new companies in business for less than three years. Existing 401 (k) plans are not required to auto-enroll employees, just new plans.
- The changes would also allow employees to withdraw up to $1,000 from their retirement accounts penalty-free in the case of personal or family emergencies such as a terminal illness or natural disaster. One emergency distribution up to $1,000 will be permitted each year starting in 2024. If the taxpayer does not repay that $1,000 in three years, they cannot take another distribution during that time.
Small Employers
- Smaller employers also are of focus in the provisions, which incentivize them to set up retirement savings plans for their workers. Part-time workers are of focus, as well: Currently, these workers are allowed to participate in a workplace retirement plan if they have three years of service and work at least 500 hours per year. Under new legislation, that service time would be reduced to two years.
- Act increases credit from 50% to 100% of qualified start up cost for employers with up to 50 employees
- Provides for a credit, up to $1,000 per employee, of 100% of the first 2 years employer contributions, 75% for year 3, 50% for year 4 and 25% for year 5. This is effective for tax years beginning after December 31, 2022
Catch-up Contributions
- Secure 2.0 would also increase the “catch-up” contribution limit for older retirement savers, increasing from the current $6,500 limit to $10,000 starting in 2025 for savers ages 60 to 63.
- It would allow tax-free and penalty-free rollovers to Roth IRAs from 529 college savings accounts under certain conditions.
- Allow employers to contribute matching contributions to 401(k) plans on behalf of employees who opt to pay off student loans instead of saving for retirement.
- One caveat: If you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.
- IRAs currently have a $1,000 catch-up contribution limit for people age 50 and over. Starting in 2024, that limit will be indexed to inflation, meaning it could increase every year, based on federally determined cost-of-living increases.
Should you need assistance in understanding SECURE 2.0 please call Felsing LLC at 407-412-9299 or email us at info@felsingcpa.com.
Source: Checkpoint Executive Summary, Thomson Reuters
Source: Alicia Adamczyk, FortuneSource: Fidelity Viewpoints, Fidelity