SECURE ACT 2.0 Changes the Game on Retirement
The Consolidated Appropriations Act signed on December 29, 2022 contained more than a spending bill. It also contained the Securing a Strong Retirement Act (SECURE 2.0) which was a follow up to the Setting Every Community Up for Retirement Enhancement Act which was signed in 2019. SECURE 2.0 has been a long time coming and updates several provisions related to retirement plans and retirement plan distributions. The most relevant provisions include:
Change in Required Minimum Distributions: The required minimum distribution age moves to 73 in 2023 for those that turn 72 in this year and to 75 in 2033, for those that turn 74 after December 31, 2032. Currently you must begin taking distributions from retirement accounts at age 72.
Catch-Up Contributions: Currently individuals over 50 can contribute $7,500 annually as an additional 401(k) contribution. For those between the ages of 60 and 63, beginning in 2025, an extra contribution can be made equal to the greater of $10,000 or 150% of the standard catch-up Amount. IRA catch-up will be indexed for inflation beginning in 2024. Also, for those that make more than $145,000 catch-up contributions are required to be designated as Roth contributions beginning in 2024.
Penalty Reductions: If you forget to take your RMD, penalties are currently 50% of the missed distribution. SECURE 2.0 reduces the penalty to 25% and then to 10% if the error is corrected within two years. The provision is effective for 2023.
Mandatory Participation: Effective for years after 12/31/2024, employers with more than 10 employees, in existence for three years, and that offer a 401(k) plan, must provide automatic enrollment at a contribution rate of 3%. The individual employee contribution rate increases annually by 1% until it reaches 10%. An employee may elect out of this provision.
Part-Time Employees: Employees who work between 500 and 999 hours for two consecutive years must be allowed to participate in the company’s retirement plan. The waiting period is currently three years and the change is effective as of 12/31/2024.
Matching Contributions and Student Loans: Beginning in 2024, employers are allowed to add a provision to their plan to make employer matching contributions for employees who are using their money to pay off student debt as opposed to putting money in their retirement accounts. Employers can rely on an annual employee certification as to the amount of student loan payments made.
Emergency Savings: In 2024, retirement plans can be linked to “emergency savings accounts” which allow employees to make Roth contributions to a savings account. The balance in the emergency account must be eligible for distribution at least once a month and can be taken penalty free. The maximum withdrawal for an emergency is $1,000 and the account balance cannot grow to more than $2,500.
Incentives to Participate: Previously illegal, beginning in 2023 employers can incentivize participation in their plan through de minimis financial incentives. Think small gift cards, company swag and free meals.
Saver’s Tax Credit Re-vamp: Starting in 2027, lower-income taxpayers can receive a federal matching contribution of up to $2,000 per year deposited to their retirement account. The match is equal to 50% of the employees’ contributions but phases out completely at incomes of $71,000 MFJ and $35,500 Single.
Tax Credit: For employers with 50 or fewer employees, the credit for starting a retirement plan is increased to 100% of administrative costs and ranges from $500-$5,000. In addition, there is an additional credit of up to $1,000 per employee for employer contributions made for employees earning les than $100,000 during the first year of the plan. This credit decreases over the next three years.
There is quite a bit to absorb in this Act and as more details begin to roll-out we will keep you posted.
Kelly Jackson Hardy is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers, privately-held elevators and supply dealers, and cooperatives. Kelly is a principal with CliftonLarsonAllen in Princeton, Illinois, as well as a regular speaker at tax and estate planning seminars. Kelly was raised on a hog, row crop and cattle farm in central Illinois and has been involved in the ag industry her entire life. Kelly, her husband, and two sons are active in 4-H and operate a small feeder calf operation and pumpkin business.
Thanks for your evaluation of the new legislation. Any thoughts, good or bad or in-between, on the new provision allowing IRA QCDs up to $50K to fund charitable gift annuities or charitable remainder trusts? I’m struggling to find a significant benefit for the taxpayer since distributions are 100% taxable as ordinary income unless a charitably-minded donor is able to reduce taxable income by electing a lower distribution percentage from the CGA than their RMD. .