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SECURE Act 2.0 Brings More Changes to the Retirement Rules

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was signed into law December 26, 2022, as an update to the original SECURE Act that came about in 2019.

The 2019 SECURE Act turned the retirement rules (and the planning community) on their heads. It raised the age for Required Minimum Distributions (RMDs) up from age 70.5 to age 72. More drastically, it ended the so-called Stretch IRA, requiring most beneficiaries to fully distribute the account within 10 years.

Then comes along SECURE 2.0. The changes are even more numerous (more than 90!), which provides for planning opportunities. Here are some of the key provisions you should be aware of:

Effective in 2023

  • Increased age for Required Minimum Distributions (RMDs) to age 73 starting in 2023 and to age 75 starting in 2033. That means 2024 will be the first RMD year for those turning age 72 this year.
    • This gives more years between retirement and RMDs starting to possibly take advantage of doing Roth conversions in lower income years.
    • Participants in an employer retirement plan that are still working for the company can defer RMDs until the year they retire, if they aren’t more than a 5% owner in that company and the plan so allows.
    • Note that the age for being eligible to make a Qualified Charitable Distribution (QCD) from your IRA or inherited IRA is still age 70.5.
  • Reduced penalty for not taking the proper RMD to 25% of the shortfall and to only 10% if the error is corrected in a timely manner. The penalty was previously 50% of the shortfall amount.
  • Roth option available for employer plan contributions – Employees can choose pre-tax or Roth after-tax treatment for employer contributions. Previously, any employer plan contribution had to be on a pre-tax basis. If a Roth after-tax basis is chosen, the employer can deduct the contribution, but it is includible in the employee’s income. To be eligible, the employer contribution must be fully vested.
  • Roth SIMPLE IRAs and Roth SEP IRAs are now allowed.
  • Significant expansion in plan startup tax credits for small employers
    • Increased credit for startup costs (available for the 1st 3 years of the plan’s existence) – Tax credit increased to 100% of startup costs for employers with up to 50 employees, subject to an annual cap. Employers with 51-100 employees still get a credit of 50% of startup costs.
      • Employers who join/joined an existing Multiple Employer Plan (MEP) are eligible for the retirement plan start-up credit, retroactive to 2020.
    • New tax credit for employer plan contributions (available for the 1st 5 years of the plan’s existence) – Tax credit of 100% of the employer contribution made for each employee earning less than $100,000/yr., up to $1,000 per employee, in the first 2 years of the plan, then phasing down to 75% of contributions in the 3rd year, 50% in the 4th year and 25% in the 5th year. The amount of the credit is reduced for employers with 51-100 employees. No credit is allowed if the employer has more than 100 employees.
  • Retroactive first year elective deferrals for solo 401(k) plans - A sole proprietor or single-member LLC that establishes a solo 401(k) plan after year-end now has until the due date of the individual’s income tax return, without extension, to make the deferral contribution (similar to the IRA contribution rules). The “employer” contribution can be made up to the due date of the individual’s return, including extensions. The 2019 SECURE Act allowed only the employer contribution to be deductible for solo 401(k) plans established after year-end, not the deferral piece.
  • Special Needs Trusts named as beneficiary on a retirement account may now have a charitable organization as the remainder beneficiary and still qualify as an Eligible Designated Beneficiary for life expectancy RMDs, as long as all of the current trust beneficiaries are disabled.

Effective in 2024

  • The $100,000 maximum annual Qualified Charitable Distribution (QCD) amount will start indexing for inflation.
  • The $1,000 IRA catch-up contribution limit will be indexed for inflation.
  • Qualified retirement plan age 50 and over catch-up contributions must be treated as Roth after-tax contributions, except for those earning less than $145,000 in the prior year, even if regular contributions are pre-tax. This will cause complexity for plans that previously didn’t offer Roth accounts. This does not apply to SEP IRAs or SIMPLE IRAs.
  • Elimination of employer plan Roth account RMDs. If you have already been taking Roth account RMDs, you will no longer have to.
  • Increased contributions for SIMPLE plans –
    • Employers with up to 25 employees will have 10% higher deferral and catchup contribution limits. An employer with 26-100 employees can provide higher contribution limits only if it provides a 4% matching contribution or a 3% nonelective contribution (up from the usual 3% and 2%, respectively).
    • Employers will have the option to make higher nonelective contributions to all employees of up the lesser of $5,000 or 10% of compensation.
  • Student loan payment match – Employers can make matching contributions on an employee’s qualified student loan payments, as if they were salary deferrals. This helps young workers build retirement savings when they might not be able to afford to do so.
  • Surviving spouse may elect to be treated as the deceased employee, where employee died before RMDs had begun under a qualified employer retirement plan and spouse was sole beneficiary
    • Spouse’s RMDs won’t start until deceased employee would’ve started RMDs and will be over the uniform life expectancy.
    • If the spouse dies before taking RMDs, the spouse’s named beneficiaries will be treated as the original beneficiaries and thereby possibly qualify as Eligible Designated Beneficiaries for the lifetime stretch distributions instead of the 10-year rule.
  • 529 plan can be converted directly to a Roth IRA for the 529 plan beneficiary, tax-free and penalty-free, subject to several restrictions:
    • The 529 plan must have existed for at least 15 years,
    • Contributions within the last 5 years, and earnings thereon, aren’t eligible for conversion,
    • The 529 plan conversion is subject to the Roth IRA contribution limits each year, but not the AGI limit, and must be reduced by any IRA or Roth IRA contributions made for the 529 plan’s beneficiary that year. There is a lifetime limit of $35,000.
    • After conversion, it falls under the same rules as IRA balances converted to Roth IRA.
  • Emergency Roth savings accounts – Employers can add to their plan an emergency savings account for non-highly compensated employees to take penalty-free withdrawals. The employer can automatically opt employees into these accounts at no more that 3% of their salary, up to $2,500 and subject to matching. Contributions are made on a Roth after-tax basis. At separation from service, the balance can be taken in cash or rolled into a Roth account.
  • New 10% early withdrawal penalty exceptions added, including a new emergency withdrawal exception of up to 1 withdrawal per year of up to $1,000. No further emergency withdrawals are permitted for 3 years, unless regular employee contributions since then add up to the withdrawn amount or the prior withdrawal has been repaid.
  • Starter 401(k) plans and safe harbor 403(b) plans will be available for employers who have no retirement plan. The plan must require auto-enrollment, employee deferrals only (no employer contribution) and contributions limited to the IRA contribution limit. This is aimed to ease the administrative requirements and cost of establishing a plan to enable employers to more easily establish a retirement plan so workers can save for retirement.

Effective in 2025

  • Increased employer plan catchup contributions for participants ages 60 to 63 beginning in 2025 to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up amount.
  • Many new 401(k) and 403(b) plans will be required to include auto-enrollment, excluding small businesses (10 or fewer employees), new businesses (less than 3 years old), church plans, governmental plan and SIMPLE plans. Existing plans aren’t subject to this provision.

Whew – and there are many more provisions.

Note that the new law does not restrict or eliminate Roth conversion of after-tax retirement account balances. Therefore, backdoor Roth IRAs are still allowed as is Roth conversion of after-tax contributions in an employer plan that accepts such contributions.

For guidance on how these provisions impact you or your business, please consult your financial planner or tax advisor. And if you have any questions or are interested in learning more about this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts today.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.