Insights On the SECURE 2.0 Act of 2022
March 18, 2024 by Gordon Advisors
Implications for Tax Savings on Retirement Plans
by Hannah Thoms, CPA, M.S.F., CFP®, AEP® shareholder, Gordon Advisors, P.C.
Savings for retirement can be challenging for many Americans. While Social Security provides a foundation for funding retirement savings, personal retirement savings become increasingly important with longer life spans. As the massive baby boom generation shifts from paying into the system to receiving benefits from it, there are concerns about maintaining the amount of contributions to the Social Security trust fund.
To make it easier for employees to save for their future, the U.S. Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019 to provide greater flexibility in employer-sponsored retirement savings plans. As an expansion of the Secure Act, the SECURE 2.0 Act was signed into law in 2022.
Changes to employer-based retirement savings plans legislated by the SECURE 2.0 Act are designed to expand opportunities for retirement savings so that workers do not have to rely primarily on Social Security in their golden years. The primary objectives of the SECURE 2.0 Act include:
- To encourage employees to save more for retirement
- To provide for flexibility and improve retirement savings rules
It’s important to understand the benefits of the SECURE 2.0 Act in general and the years in which new benefits are activated to assist with current, and future, personal retirement and tax planning. Some changes are in effect for 2023 and 2024, while others are set to go into effect in 2025 and in later years.
While the SECURE 2.0 Act contains more than 90 provisions affecting employer-based retirement savings plans, six changes are important for personal retirement planning and savings, including:
- New required minimum distribution (RMD) rules
- Automatic enrollment in employee retirement plans
- Changes to 401 (k) catch-up contributions
- Emergency withdrawal flexibility
- 529 Plan Roth IRA rollovers
- 401 (k) match for student loan payments
These provisions are detailed below.
New Required Minimum Distribution Rules (RMD)
Effective January 1, 2023, new age parameters for RMDs from retirement plans increase from beginning at age 72 to age 73, and will go up to 75 years-of-age in 2033. For earners who can wait to tap into their retirement funds, this change enables them to continue to grow their nest egg with the added power of compounding interest.
Another benefit concerns a reduction in the excise tax, which is the tax penalty for failing to take an RMD: It’s reduced from 50% to 25%. However, if the failure to take an RMD is corrected in a timely fashion, the tax penalty is further reduced from 25% to 10%.
Additionally, the RMD for a Roth employer-sponsored 401(k) or other qualified retirement plan is eliminated beginning January 1, 2024.
Automatic Enrollment in Employer Retirement Plans
Beginning in 2025, employers will be required to automatically enroll eligible employees in new 401 (k) or 403 (b) plans to encourage retirement savings. Using pre-tax dollars, the participation amount starts at 3% with a ceiling of 10%. The employee contribution rate increases at the rate of 1% each year, with a minimum of 10% and a maximum of 15%. Businesses with 10 or fewer employees, businesses in existence for less than three years, as well as church and government retirement plans, are exempt from the requirement.
Employees are not locked into participating in their employer’s retirement savings plan. They can opt out at any time, even on the day of enrollment. The SECURE 2.0 Act cannot require employee participation in an employer-sponsored retirement savings plan. However, employers can offer small financial incentives (e.g., gift cards) to encourage employee participation in retirement plans.
Changes to Retirement Catch-Up Contributions
The SECURE 2.0 Act implements changes to catch-up contribution limits, annually and sequentially, from 2024 through 2026. It’s critical to know the timeframe for each provision’s activation so employees can achieve maximum benefit from these expanded retirement benefits.
Currently, people ages 50 years or older can make a $7,500 catch-up contribution to an employer-sponsored plan. Beginning on January 1, 2025, this contribution amount increases to $10,000 annually for workers from age 60 to 63.
Also beginning on January 1, 2025, the catch-up limits for 401 (k), 403 (B) and 457 retirement plan participants ages 60 to 63 are substantially increased to whichever is greater: $10,000 or 50% more of the standard catch-up amount for that year. After 2025, the catch-up amounts will be indexed for inflation. SIMPLE IRA plans will also see an increase in contribution limits — from $3,500 to $5,000. This dollar amount will be indexed for inflation, as well.
Starting on January 1, 2026, workers who are at least 50 years-of-age and have incomes of $145,000 or more in the previous year can make catch-up contributions to their 401 (k) accounts only on a Roth basis using after-tax dollars.
Emergency Withdrawal Flexibility
Beginning January 1, 2024, the SECURE 2.0 expands employees’ emergency access to their retirement funds without incurring any early withdrawal penalties, which could be up to 10% of the money withdrawn. Retirement plan participants may withdraw up to $1,000 once per year to cover emergency personal or family expenses. Also, employees will have the option to set up a Roth emergency savings account with contributions up to $2,500 per year.
Additionally, the SECURE 2.0 Act contains provisions for early funds withdrawal for survivors of domestic abuse. They can access the lesser of $10,000, or 50%, of their retirement account without penalty.
For victims of a natural disaster (defined as a qualified, federally declared disaster), they can withdraw up to $22,000 from their employee-sponsored retirement savings account without penalty. The monies are treated as gross income over three years without incurring any tax penalties.
529 Plan Roth IRA Rollovers
The rules governing access to excess funds remaining in a student 529 college savings plan after graduation have kept many accounts in limbo in efforts to avoid penalties for nonqualified education distributions. This uncertainty will be largely eliminated by the new 529-to-Roth IRA transfer rule in the SECURE 2.0 Act.
New provisions in the SEUCRE 2.0 Act allow unused savings from a student’s 529 college savings plan to be transferred to a Roth IRA retirement savings account without incurring taxes or penalties. This new distribution rule goes into effect on January 1, 2024, and brings a great opportunity to save for retirement.
Under the new rule, the lifetime maximum that can be transferred by a 529 beneficiary is $35,000 and the account must have been opened for a minimum of 15 years. No contributions or earnings on contributions from the five-year period before the date of transfer can be included in the dollar amount transferred. Additionally, the transferred dollar amount will be subject to annual Roth IRA contribution limits (currently $7,000) without an upper-income restraint. With this rule, any monies remaining after a student completes college can be transformed into retirement savings.
Before rolling over the 529 plans consider state implications. Not all states follow federal law.
Student Loan Payment 401 (k) Match
Employees saddled with student loan debt may not have the disposable income to enroll in a company’s retirement savings plan. For companies offering matching contributions, employees can miss out on this savings opportunity if they can’t afford to participate.
Starting in 2024, the SECURE 2.0 Act will allow employers to make retirement plan matching contributions based on the employee’s qualified student loan payments. The employer match must not be more than the dollar amount of the total matching contributions available in the plan. With this new provision, employees with high student loan debt can benefit from company matching contributions as they work toward paying down their loan balances.
Enhanced access to retirement savings opportunities
New provisions in the Secure 2.0 Act are designed to help workers save for retirement while giving them access to savings to handle emergency situations with defined rules for avoiding tax penalties on monies withdrawn from an employer-sponsored retirement savings account.
With the staggered timeline for the implementation of the many provisions and rules contained in the SECURE 2.0 Act — about 90 total — it’s best to talk with a tax advisor to help you understand the benefits to which you’re entitled, as well as the tax year they become effective.
For further guidance, reach out to your tax professional at Gordon Advisors, P.C.