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At the end of 2022, President Biden signed the legislation containing the SECURE Act 2.0 into law. This legislation was built on the SECURE Act of 2019, intended to broaden and increase opportunities for retirement savings.
Whether you have a self-directed IRA (SDIRA), another type of retirement account, or even no retirement account yet, changes in the SECURE Act 2.0 will likely affect your retirement strategy.
Below is a breakdown of some of the provisions in the SECURE Act 2.0. We’ll focus on the changes that will affect IRAs and employer-sponsored plans like Individual 401(k)s, SEP, and SIMPLE plans. You can learn more about all of the provisions in this legislation here.
Key takeaways:
Individuals turning age 72 in 2023 will have an extra year to start taking RMDs. As of 2023, the new age for RMDs will be age 73.
Catch-up contributions are additional contributions allowed for individuals 50 and over. This new provision creates additional contribution opportunities for individuals aged 60-63 beginning in 2025.
For 401(k) plan participants aged 60-63, the catch-up contribution limits increase to the greater of $10,000 or 50% more than the regular catch-up amount.
For SIMPLE IRA plan participants aged 60-63, the catch-up contribution limits increase to the greater of $5,000 or 50% more than the regular catch-up amount.
Currently, IRA annual catch-up contributions for individuals aged 50 and over are fixed at $1,000. This provision will allow increases to be adjusted based on cost-of-living adjustments (COLAs). In the event of an increase in COLA, catch-up contributions will increase as well. This potential increase will take effect in 2024.
Under previous law, individuals who failed to distribute their annual RMD were subject to a 50% penalty calculated based on the amount the individual failed to distribute.
Thanks to the SECURE Act 2.0, this 50% penalty will now be reduced to 25%. In addition, if the failure to distribute is corrected (distributed) by the end of “the earlier of the date the IRS discovers the issue or December 31 of the following year, the penalty will be reduced to 10%." This change is effective immediately.
Many individuals who have terminated employment lose track of their retirement funds. Sometimes these accounts get rolled over to an IRA custodian the previous employer selected, but participants are often unaware where their funds end up. This legislation institutes a lost and found mechanism designed to help ex-participants find their missing retirement funds.
This database must be created no later than the end of 2024.
Previously, there were no correction methods for some transaction errors involving IRAs. This change, effective 2023, will expand the current compliance resolution system to identify common errors and provide a mechanism for correction. This will help investors find and correct errors and avoid losing the IRA’s tax-advantaged status due to unintentional mistakes.
Under previous law, individuals 70½ or older were able to use a QCD to donate up to $100,000 to qualified charities directly from an IRA. With the SECURE Act, the annual QCD limit of $100,000 will be indexed for inflation, effective for tax years after 2023.
It also includes a one-time election for a QCD to fund one of the following: a charitable remainder unitrust, a charitable remainder annuity trust or a charitable gift annuity. The limitation to fund one of these is $50,000, also indexed for inflation starting in 2024.
Currently, individuals may take a penalty-free distribution to pay for qualified birth and adoption expenses. If the adoption does not go through, this new provision will allow for the distributed amount(s) to be repaid for up to 3 years. This provision is effective immediately and applies retroactively to distributions prior to the enactment of the legislation.
If an individual can self-certify that they have been the victim of domestic abuse, they can take a penalty-free distribution from their retirement funds. The maximum amount allowed is the lesser of $10,000 or 50% of the individual's vested balance. This provision will go into effect in 2024.
Under the previous law, when an individual had an excess contribution or missed an RMD, the statute of limitations would begin when the violation was found. This means that an individual could be liable for all penalties accrued between when the violation occurred and when it was discovered.
Under the new law, the statute of limitations begins the year the violation occurred, regardless of when it is discovered. This means that if an individual misses an RMD and three or more years have passed since the violation, it is absolved. The same applies for excess contributions, except the statute extends to six years. This provision is effective immediately.
Effective immediately, this provision confirms that if an individual has multiple IRAs, only the IRA that engages in a prohibited transaction will be disqualified.
Effective in 2024, an employer that does not sponsor a retirement plan can offer a starter 401(k) plan (or safe harbor 403(b) plan). A starter 401(k) plan (or safe harbor 403(b) plan) would generally require that all employees be enrolled by default in the plan at a 3% to 15% compensation deferral rate.
The limit on annual deferrals would be the same as the IRA contribution limits defined for both Roth and traditional plans: $6,500. This provision will go into effect in 2024.
Employers will be allowed to replace a SIMPLE IRA plan with a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions during a plan year. This provision will go into effect in 2024.
Currently, matching contributions in a 401(k) plan are made on a pre-tax basis. This provision will allow employers to make a post-tax Roth matching contribution. This provision is effective immediately.
SAR-SEPs and SIMPLE employer contributions are historically made on a pre-tax basis. This provision will allow employers to have the option to make a post-tax Roth SAR-SEP or SIMPLE contribution.
SEP contributions can also be made as a post-tax Roth contribution if elected. Contributions will not reduce the employer’s and employee’s taxable income. This provision is effective immediately.
Employers who have at least one rank-and-file employee can receive a tax credit by setting up an employer plan (i.e., SEP, SIMPLE or 401(k)) if they have not maintained another plan during the prior three years.
The amount of the employer tax credit is currently the greater of 50% of the first $1,000 of expenses ($500.00) or the lesser of $250 per rank-and-file employee capped at $5,000. The credit can be utilized for three years.
Under this new provision, it increases the 50% to 100% for the first year and second year, 75% for the third year, 50% for the fourth year and 25% for the fifth year. This provision is effective immediately.
Under current rules, employers could generally exclude employees from participating in a 401(k) plan if they have not satisfied the service requirements of the plan. Part-time employees may not have been excluded from participating if they worked for the employer for a period of three years and worked for at least 500 hours during each year.
The new provision lowers the three years to two years, allowing part-time employees to participate in the plan sooner. This could affect employers who maintain Individual 401(k) plans and hire part-time employees. This provision will go into effect in 2025.
Employers may rely on an employee’s self-certification for hardship distributions. The employer may also rely on the employee’s self-certification that the hardship distribution is not more than the actual amount needed for the hardship. This provision is effective immediately.
Community property rules will no longer influence inequities when spouses own two separate businesses in community property states.
Previously, when spouses each had their own businesses, and they resided in a community property state, both organizations would be pulled in for controlled group determination. This meant that in some cases, only one plan had to cover both businesses, even if they were two separate businesses.
Under the new provisions, each spouse’s business would remain separate – even in community property states. This would allow each self-employed or business owner spouse to choose a tax-advantaged plan for themselves, regardless of the business structure or number of employees of their spouse.
The new provision would remain in place even in the case where the couple has a child under the age of 18. It is effective for plan years beginning in 2024.
The SECURE Act allowed employers to establish their 401(k) plan up until their tax return due date, plus extensions. The latest provision affirms that a small business owner who adopts their plan by their tax return due date (plus extensions) will be allowed to defer into the plan, making the deferral effective as of the last day of the plan year. This provision is effective immediately.
Non-responsive, terminated participants of a 401(k) plan who had a balance of new contributions with less than $5,000 but greater than $1,000 may have their balances rolled over to an eligible IRA custodian. This threshold has been increased from $5,000 to $7,000. This provision will go into effect in 2024.
Effective in 2024, pre-death RMDs in 401(k) plans will no longer be placed in account-designated Roth accounts when calculating RMDs.
The effective dates of these provisions vary. If you have additional questions about what the provisions could mean for your investment strategy, consult your financial, legal, or tax advisor.
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