As part of the recently approved 1.7 trillion-dollar spending bill, Congress has approved a measure known as Secure Act 2.0. A supplement to the original Secure Act that passed at the end of 2019, this legislation creates new savings opportunities and tax incentives.
Depending on your situation, it may have a significant impact on how you accumulate and withdraw your retirement savings. As part of a much larger omnibus bill (4,000 pages long), it’s undoubtedly more complicated than it needs to be.
If certain provisions seem strange, you can be sure you are looking at a rule that either saved money or generated just enough “projected” tax revenue to hit a necessary hurdle to be politically palatable. You may also be witnessing government lobbyists winning a round or two for their respective industries.
In lieu of a sensible set of rules that aim to benefit as many deserving folks as possible, we have been presented, yet again, with a highly complex set of stipulations and regulations, which we will do our best to stay on top of for you.
To save time, find your situation below and read about your most likely personal impacts.
Workers Funding 401(k)s/403(b)s
Workers over age 50 already have a catch-up provision to add additional funds above and beyond the standard limits to their retirement plans, but starting in 2025, those over 60 and under 64 will have a supercharged catch-up rule. They’ll be able to add an additional $10,000 per year to their plan (vs. the normal catch-up of $7,500). If you are 65 or older, the catch-up amount goes back down to the normal amount.
If that caveat sounded odd, here’s another bizarre rule. Beginning in 2024, all catch-up contributions must be made with after-tax dollars as Roth contributions if income is greater than $145,000. (This threshold will change with inflation.) This is an example of Congress looking for some tax dollars upfront to make their budget math work.
401(k) participants will now have an expanded ability to take emergency withdrawals from their plan. Limited to $1,000, you can’t take a second withdrawal until three years have passed or the first one is paid back (whichever occurs first). There are also expanded penalty-free withdrawal options for victims of domestic abuse, those experiencing natural disasters, those paying long-term care premiums, and the terminally ill.
The Secure Act 2.0 requires employers starting a new retirement plan for their employees (if 10 or more) to automatically enroll employees when they become eligible and initiate a payroll deduction of between 3% and 10% of income.
The employee may opt out, but if they do not, the deferral will increase annually by 1% to a max of between 10% and 15%, depending on the employer’s preference. This is effective for plan years starting after Dec. 31, 2024.
In a dramatic move to encourage small businesses to offer retirement programs, effective immediately, any employer with 50 or fewer employees can receive tax credits for three years to offset retirement plan startup costs up to $5,000 per year.
SIMPLE and SEP IRA plans now have Roth options available. It may take custodians and broker-dealers a little while to actually offer these plans, but the IRS has given the green light.
Those Charitably Inclined (and Over 70 1/2 Years Old)
The annual qualified charitable deduction (QCD) limit will increase from $100,000 to $200,000 for IRA owners over 70 1/2 years old looking to make a tax-free withdrawal to donate directly to a charity.
Retirees Born After 1950
Until 2020, retirees were required to begin distributions from their retirement accounts in the year they turned 70 1/2 years of age. That was pushed back by the first Secure Act to age 72. Secure Act 2.0 pushes it back yet again to 73 for those born between 1951 and 1959. For those born after 1959, required minimum distributions won’t start until age 75.
Younger Workers/Recent Graduates
Although a recent executive order from the Biden administration designed to forgive student loans for millions is held up in court, employer retirement plan participants can still get some relief. Beginning in 2024, employers are permitted to make matching student loan payment contributions/reimbursements on a pre-tax basis into qualified retirement plans.
Unused balances from 529 college savings plans can now be transferred to Roth IRAs. However, there are significant restrictions to this rule:
- It can only be transferred to the 529 plan beneficiary’s Roth IRA.
- The 529 must have been been established for 15 years or more. This is still hot off the presses, so we’ll need to read the fine print first.
- The amount transferred cannot exceed the annual Roth contribution limit minus any contributions already made, although the income limit on contributions does not apply to transfers made.
- There is a lifetime max of $35,000 in transfers.
- You cannot transfer funds attributable to contributions or earnings on those contributions from the prior five years.
The “saver’s credit,” a tax credit for lower-income workers contributing to retirement plans, gets a huge makeover in Secure Act 2.0 starting in 2027.
Under the rule, married taxpayers making less than $41,000 (phased out at $71,000) would get a 50% match for every dollar they contribute to a retirement plan up to a max of $2,000 per person ($1,000 match). Single taxpayers will phase out between $20,500 and $30,500.
A similar credit, though not as generous, exists today and will continue to until the new rule takes effect in 2027.
The above is not an exhaustive list, but it should cover the vast majority of changes impacting most savers. The graphic below illustrates how many rules phase in over time. If you have any questions about how the new rules may change your retirement strategy, don’t hesitate to reach out to us.