What’s In the SECURE Act 2.0?

At the end of December, President Biden signed the Consolidated Appropriations Act of 2023 into law. While the primary purpose of the legislation was to allocate federal funding for the coming year, it did contain several other parcels of legislation within. One of these was the Securing a Strong Retirement Act of 2021, more commonly referred to as the SECURE Act 2.0. The long-awaited legislation aimed at new retirement savings reform is based on many of the changes initially proposed both in the House and Senate. These include changes to plan design, modified RMD rules, matching student loan payments, and expanded eligibility for part-time employees. In total, there are more than 100 provisions affecting retirement plans. To help prospects, clients, and others, Klatzkin has provided a summary of the key details below.

New Retirement Plan Provisions

While most elements of the new law have already been included in different drafts, there are two provisions new to SECURE 2.0.

• Savers Tax Credit – The saver’s credit is targeted to lower-income taxpayers and provides for a 50 percent match to an IRA or other retirement plan beginning in 2027. This would replace the existing tax credit. The match would be deposited directly into the participant’s retirement account.
• Starter 401(k) Plan – Another new change, the starter 401(k) or safe harbor 403(b), lets employers without an existing retirement plan maintain a deferral-only arrangement beginning in 2024. Employees would be automatically enrolled for a three to 15 percent salary deferral, up to current-year IRA contribution limits.

Changes to Required Minimum Distributions (RMDs)

Predictably, the required beginning date for RMDs will be increased again to age 73 starting this year. In 2033, it will increase again to age 75. Taxpayers who are already 72 must continue taking their RMDs as scheduled. If taxpayers turn 72 in 2023 and scheduled their first RMD for later this year, they may want to consider delaying it if they don’t need the income.

Also starting in 2023, the penalty for failing to take an RMD is lower: from 50 percent to 25 percent. IRA owners will see an even lower penalty – ten percent – if they self-correct and submit an updated tax return. Another 2023 update for RMDs will allow annuity participants to apply any excess in-plan annuity payments to their RMD for the year.

Finally, starting in 2024, all Roth accounts will be exempt from RMDs.

Matching Student Loan Payments

In welcome news for taxpayers with student loan debt, SECURE 2.0 allows employers to make matching contributions to 401(k), 403(b), 457(b), and SIMPLE IRA plans for qualified student loan payments.

Part-Time Employee Access to Employer-Sponsored Retirement Plans

The first SECURE Act made it easier for part-time employees to contribute to employer-sponsored retirement plans. Under that legislation, the employee needed to have at least three years of consecutive employment and at least 1,000 hours of employment within 12 months to qualify. Starting in 2025, the three-year rule will be reduced to two years.

Catch-Up Contributions

In 2023, catch-up contributions for taxpayers 50 and older are $7,500 for employer-sponsored plans and $1,000 for IRAs. Starting in 2024, all catch-up contributions for taxpayers earning more than $145,000, adjusted annually, will be designated Roth contributions.

Further, taxpayers age 60-63 can make additional catch-up contributions beginning in 2025. The limit will be $10,000 for most plans and $5,000 for SIMPLE plans. The amounts are tied to inflation adjustments.

Retirement Plan Withdrawals and Emergency Savings

Taxpayers may make up to one $1,000 emergency withdrawal from their retirement plan every three years, penalty-free. The withdrawals must be for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” Taxpayers can make one distribution per year if they repay the initial emergency withdrawal within three years.

Penalty-free emergency withdrawals up to $10,000 or 50 percent of the account balance (whichever is less) will also be permitted in other extenuating circumstances, like domestic abuse. The withdrawal can be repaid over three years. Those with a terminal illness may also make penalty-free withdrawals.

Beginning in 2023, employees can defer up to three percent or $2,500, whichever is less, to a Roth-designated emergency savings account. This benefit is only available to non-highly compensated employees. The first four withdrawals in a year will be a penalty- and tax-free. Certain plans may elect to match employee contributions.

Finally, participants affected by federally declared disasters can take distributions of up to $22,000 from employer-sponsored retirement plans. This is effective for plan years after January 26, 2021, so taxpayers in certain areas may want to double-check to determine eligibility.

Other Notable Elements of SECURE 2.0  

Beyond the updates above, there are other changes, including:

• Starting in 2025, businesses with new retirement plans will be required to implement automatic enrollment with a minimum three percent contribution rate. This change does not affect existing retirement plans.
• 529 college savings plans can be rolled over into a Roth IRA for the beneficiary after 15 years. This is limited to annual contribution limits and a total lifetime limit of $35,000. If elected, the rollover would count towards the taxpayer’s annual Roth IRA contribution limit.
• Employees requesting hardship withdrawals from employer-sponsored retirement plans can self-certify that they meet the criteria.
• Beginning in 2024, the pre-death RMD requirement for Roth IRAs will be eliminated.
• Employers will be permitted to offer small financial incentives, like gift cards, to increase employee participation in retirement plans.
• The tax credit for first-time benefit plan startup costs has been increased from 50 percent to 100 percent of administrative costs, up to $5,000 annually. Eligible employers must have less than 50 employees.

Contact Us

These changes are welcome news for many looking to bolster retirement-saving activities. Since several of the provisions are not effective until after this year, it is important to consult with a qualified advisor to determine how you will be impacted. If you have questions about the information outlined above or need assistance with a retirement or estate planning need, Klatzkin can help. For additional information call 609-989-9189 or click here to contact us. We look forward to speaking with you soon.

©2023 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.