On December 29th, the President signed the SECURE Act 2.0 of 2022 into law, a thorough update of the initial SECURE Act that became law in 2019. The main purpose of the new Act is to help Americans save more effectively for retirement, which is crucial because retirement savings are becoming increasingly important in today’s society.
The SECURE Act 2.0 of 2022 significantly improves retirement savings management and regulation, offering new opportunities for securing your financial future. If you’re uncertain about how this new law might impact your retirement strategy or what to expect, don’t worry – we’re here to help.
Our guide aims to provide a clear and concise overview of the SECURE Act 2.0 of 2022, highlighting its key provisions and how they may benefit you. Additionally, we’ll cover any potential tax implications resulting from the new act and other important things you should be aware of. If you’re ready to improve your retirement savings strategy, let’s explore everything the SECURE Act 2.0 offers!
Overview of Key Provisions and Changes
The SECURE Act 2.0 of 2022 made several changes to retirement savings that will have an impact on how people save for retirement. Among the key provisions and changes are:
Required minimum distributions (RMDs)
The SECURE Act 2.0 of 2022 modified the age at which people must begin taking required minimum distributions (RMDs) from their individual retirement accounts (IRAs). The Act extends the required start date for RMDs. Individuals turning 72 in 2023 or later will not be required to begin taking RMDs until they reach the age of 73. Those who reach the age of 74 after December 31, 2032, must begin at the age of 75.
In addition to the delayed required beginning date, the SECURE Act 2.0 has changed RMDs in the following ways:
- beginning in 2024, a spousal beneficiary may elect to be treated as the employee for RMD purposes;
- the excise tax for failure to take RMDs is reduced from 50% to 25%, and further reduced to 10% if the individual corrects the shortfall within a two-year correction window; and
- RMDs are no longer required (prior to the participant’s death) from Roth accounts.
Plan administrators must modify their RMD procedures to ensure that RMDs are distributed correctly from the plan. Individuals should keep up to date on these changes and consult with a financial advisor if they have any questions or concerns about their retirement savings.
New provisions in SECURE 2.0 make it easier for individuals to access their retirement savings in times of emergency. Individuals are permitted to withdraw up to $1,000 from a retirement plan, including an IRA, for emergency personal expenses without being subject to the 10% excise tax. The funds must be used for unforeseeable or immediate financial needs arising from personal or family emergencies.
Individuals may take advantage of this provision by repaying the distribution to an employer retirement plan or an IRA within three years of the distribution date. If an emergency personal expense distribution is made in a year, no other distribution during the immediately following three-calendar-year period may be treated as an emergency personal expense distribution unless the prior distribution is repaid or the individual’s annual retirement plan contributions to all plans and IRAs (e.g., the individual’s own elective contributions to 401(k) plans) are repaid.
This change is effective for distributions made after December 31, 2023, giving individuals facing financial hardships more flexibility. It should be noted that this provision is limited to one emergency personal expense distribution per year, and individuals should still consider the long-term impact of early withdrawals on their retirement savings.
Other Penalty Free Distributions
The proposed SECURE 2.0 introduces other new exceptions to the 10% penalty that is typically applied to early distributions from retirement accounts. These exceptions include:
- Penalty-free distributions for domestic abuse victims, effective for distributions made after December 31, 2023.
- Penalty-free distributions for individuals with a terminal illness, effective for distributions made after December 29, 2022.
- Penalty-free distributions of up to $2,500 per year for certain specified long-term care insurance contracts, effective for distributions made after December 29, 2025.
Currently, employees aged 50 and over are allowed to make catch-up contributions to their retirement plans to increase their savings as they approach retirement. The current catch-up contribution limit for 2022 is $6,500, which increases to $7,500 in 2023.
Under the proposed SECURE 2.0, the catch-up contribution limit will increase as follows:
- For employees aged 50-59, there will be no change to the current catch-up contribution limit, however it will be adjusted for inflation
- For employees aged 60-63, the new catch-up contribution limit will be $10,000 or 50% of the regular catch-up amount, adjusted for inflation.
This higher contribution limit will apply to individuals who reach the ages of 60, 61, 62, or 63 in that tax year. This provision will become effective for taxable years beginning after December 31, 2024.
SECURE Act 2.0 also requires catch-up contributions to be designated as Roth contributions for any plan participant with earnings in excess of $145,000, beginning with tax years after 2023. This means that while these contributions are taxed in the year they are made, they are not taxed when withdrawn in retirement. Employers can also make matching and non-elective contributions to designated Roth accounts, which will increase their employees’ retirement savings.
Individuals over the age of 50 should take advantage of these catch-up contribution provisions because they can help accelerate retirement savings and ensure a more secure financial future.
The former “saver’s tax credit” has been replaced by a new provision in SECURE 2.0 legislation that provides a federal contribution to a taxpayer’s traditional IRA or other non-Roth retirement plan. The saver’s tax credit provided low-income taxpayers with an annual tax credit of up to $1,000 for contributions to a retirement plan or an IRA.
The Saver’s tax credit is replaced by “Saver’s Match”, a federal contribution to the taxpayer’s traditional IRA or other non-Roth retirement plan under SECURE 2.0. The contribution will be equal to 50% of the taxpayer’s annual retirement plan contributions, up to $2,000 per individual. The matching contribution will be phased out based on adjusted gross income, with limits ranging from $20,500 to $35,500 for individuals, $41,000 to $71,000 for married couples filing jointly, and $30,750 to $53,250 for heads of household. For years after 2027, these limits will be adjusted for inflation.
Taxpayers under the age of 18, tax dependents of another person, full-time students, and nonresident aliens are not eligible for the matching contribution.
Student Loan Repayment
The SECURE Act 2.0 includes a new provision to increase retirement savings for employees struggling to repay student loan debt. Employer contributions to 401(k) or 403(b) plans can now be treated as salary deferral for the purpose of repaying student loans under the new law. Starting in 2024, student loan payments will be treated as elective deferrals or employee contributions to 401(k) plans, making them eligible for the company’s matching policies.
This provision provides a unique opportunity for employees who are unable to save for retirement due to student loan repayments to receive employer-matching contributions to their retirement plans. As a result, employees can increase their retirement savings while paying off their student loans with this provision, which is a win-win situation for both employees and employers.
The new law acknowledges a reality that many employees face today: student loan debt has become a significant financial burden for many Americans, making it difficult for them to save for retirement. Employers can help their employees prepare for their financial future by supporting their student loan repayment and retirement savings efforts under this provision. This is an important step toward addressing employees’ challenges in saving for retirement while repaying student loan debt.
529 Plan Transfers
Individuals will have a new opportunity in 2024 thanks to the addition of the ability to transfer funds directly from a 529 plan account to a Roth IRA under the SECURE Act 2.0. To qualify for this opportunity, the 529 plan account must have been open for at least 15 years prior to the transfer.
When considering a transfer from a 529 plan account to a Roth IRA, keep the following restrictions in mind. The transfer is limited to a lifetime maximum of $35,000 and an annual maximum rollover equal to the annual Roth IRA contribution limit, less any Roth IRA contributions. Furthermore, the transfer cannot exceed the total amount of contributions and earnings to the 529 plan over the previous five years.
This new provision will be effective for transfers made after December 31, 2023, and it allows individuals to diversify their retirement savings while also considering the tax advantages of a Roth IRA. It is critical to consult with a financial advisor to determine whether transferring from a 529 plan account to a Roth IRA is the best option for your specific situation.
The SECURE 2.0 Act expands the automatic enrollment provisions in 401(k) and 403(b) retirement plans by requiring employers to enroll their employees in the plan automatically. This will start in 2025. Employees are required to contribute 3% of their eligible earnings, with the option to opt out or choose a different contribution rate. The contribution amount will be increased by 1% each year until it reaches a minimum of 10% and a maximum of 15%.
If the participant does not make an investment choice, their automatically contributed balances must be invested in accordance with the regulations for qualified default investment alternatives (QDIA). QDIAs are most commonly used as target date retirement funds or asset mix funds, with investment allocations based on the client’s age and expected retirement date.
The provisions for automatic enrollment will not apply to all employers. Exceptions include small businesses with 10 or fewer employees, newer businesses that have been in operation for less than three years, churches, governmental plans, and SIMPLE plans. Furthermore, plans established prior to the enactment date of the SECURE 2.0 Act are exempt from the automatic enrollment requirements.
The rules for long-term, part-time employees’ eligibility for 401(k) plans have changed under SECURE 2.0. Previously, employees had to meet one of two requirements to be eligible for a 401(k) plan (excluding those covering union employees): 1) serve for one year and work at least 1,000 hours; or 2) serve for three years and work at least 500 hours. Plan sponsors frequently used the second requirement to avoid passing annual nondiscrimination testing.
The service period for the second requirement has been reduced from three years to two years with the implementation of SECURE 2.0. This change takes effect for plan years beginning after December 31, 2024, and service prior to that date will not be considered for eligibility or vesting purposes. This provision is intended to make 401(k) plans more accessible to long-term, part-time employees while also providing them with a means to save for the future.
Tax Credits for Small Businesses
Small Business Tax Credit
The SECURE 2.0 Act increases the annual tax credits available to small businesses that establish a new retirement plan. This change is intended to assist employers in covering the initial costs of establishing a retirement plan for their employees.
Previously, the Retirement Plans Startup Costs Tax Credit was limited to 50% of administrative costs for the first three years, with a maximum annual credit of $5,000. The SECURE 2.0 Act raises the percentage limit for employers with fewer than 50 employees to 100% of administrative costs. The credit remains 50% for employers with 51 to 100 employees.
Additionally, there is a new credit for employer contributions up to 100% of contribution capped at $1,000 per employee for the first five years of a new plan. This credit percentage decreases from 100% in the first and second years to 75% in the third year, 50% in the fourth year, and 25% in the fifth year. This credit is phased out for employers with more than 50 employees.
Any employee whose compensation for the year of contribution exceeds $100,000 is not eligible for a contribution credit (indexed for cost-of-living adjustments for years after 2023).
Plus, the automatic enrollment tax credits of $500 per year is still available for the first three years of a new plan.
Military Spouse Tax credit
SECURE 2.0 creates a new tax credit for eligible small businesses that hire military spouses and allow them to participate in their retirement plan. The tax credit is equal to the sum of (1) $200 per military spouse and (2) 100% of all employer contributions made on behalf of the military spouse, up to a maximum of $300. This credit is available for up to three years for each military spouse.
However, to be eligible for the tax credit, military spouses are subject to special eligibility and vesting requirements. Also, this tax credit is not available to highly compensated employees. The maximum tax credit per military spouse is $500.
The SECURE Act 2.0 of 2022 will significantly alter how retirement savings are managed and regulated. Individuals, as well as tax and accounting services, will face both exciting opportunities and potential challenges as a result of this new legislation. Updates to mandatory minimum distributions, increased catch-up contributions for those over 50, and automatic enrollment in 401(k) and 403(b) plans are among the most significant changes.
As you plan for retirement, it’s critical to stay informed about these changes and to consult with a financial advisor if you have any questions or concerns. By doing so, you can ensure a secure and comfortable retirement and feel confident about your financial future. With the right guidance, the provisions of the SECURE Act 2.0 can help you reach your retirement goals and safeguard your financial future. Don’t pass up the chance to take charge of your retirement.
SECURE Act 2.0 Guidance from Eco-Tax, Inc.
If you’re looking for expert guidance on how to take advantage of the SECURE Act 2.0 and plan for a secure retirement, look no further than Eco-Tax, Inc. With over two decades of experience and an A+ rating from the Better Business Bureau, we have the knowledge and expertise to guide you every step of the way. Our team of seasoned professionals is committed to helping you navigate the complexities of tax laws and regulations, so you can achieve your retirement goals and safeguard your financial future. Contact us today to schedule a free consultation and see how we can help you succeed.