Secure Act 2.0
As part of the Consolidated Appropriations Act of 2023, the SECURE 2.0 Act of 2022 (Secure 2.0) was enacted on December 29, 2022. Secure 2.0 continues to modify and expand upon provisions included in the original Secure Act of 2019. While there was a plethora of changes enacted as part of the bill, this summary will focus on certain key updates, based on their effective date.
Effective Year: 2023
Retirement Accounts
- Change to Required Minimum Distribution Ages (§107)
- For those born in 1951-1959, their RMD age is now 73 years old
- For those born in 1960 or later, the RMD age is increased to 75 (i.e., for those born in 1960, their first RMD would be in 2033)
- Note: Anyone turning 72 in 2023 will not have an RMD in 2023
- Reduction of penalty for missed RMDs (§302) – decreases from 50% to 25% (or 10% if correction is made timely within the Correction Window)
- SIMPLE and SEP IRAs are eligible for Roth treatment (§601)
- Note: Most custodians may not have the resources to carry this out until later this year, but it is effective immediately
- Defined contribution plans may provide option for Roth employer contributions (§604)
- Note: Employers are not mandated to offer this
Businesses
- Small business retirement plan startup credit (§102) – increases to 100% (from 50%) for start-up costs (up to $5,000) for employers with 50 employees or less
- Additional credit given for defined benefit employer contributions for first 4 years (employees must have FICA wages less than $100,000)
- Sole proprietors & Single member LLCs may make retroactive 401(k) elective deferrals (§317)
- Similarly to how “employer” contributions are able to be made up until the tax return filing date, this is now extended to employee elective deferrals for plan years beginning after date of enactment (December 29, 2022)
- Note: The law does not include entities that are incorporated
Effective Year: 2024
Retirement Accounts
- IRA catch-up contribution limits will automatically adjust for inflation (§108)
- Roth RMDs are eliminated for employer-sponsored retirement plans (§325)
- A surviving spouse can elect to be treated as a deceased employee for purposes of RMDs (§327)
- Note: This would primarily be useful if the decedent was younger than the surviving spouse
- Qualified Charitable Distribution (QCD) limits will begin indexing for inflation ($100,000 plus indexing) (§307)
- Law also provides new ability to make a $50,000 one-time distribution to a charitable trust or annuity (distribution would count as part of total annual QCD limit)
- For wage earners making $145,000 or more, all qualified retirement plan catch-up contributions must be Roth (§603)
- Note: The law does not state whether this would be applicable for self-employed individuals who do not have wages
- Starter 401(k) plan (or safe-harbor 403(b) plan) (§121) – new type of retirement plan available to small business owners will require auto-enrollment for employees (can opt out), and deferrals are subject to same contribution limits as IRAs
Emergency Savings
- Emergency savings and expense withdrawals – expanded opportunities for Americans to save for retirement while also building emergency savings and to take emergency-related distributions from their retirement accounts
- $1,000 emergency distribution (§115) – waives 10% early withdrawal penalty on up to $1,000/year for emergency-related distributions from tax-deferred retirement accounts
- $2,500 emergency savings account (§127) – gives employers option to link an emergency savings account to a defined contribution plan for non-highly compensated employees to contribute up to $2,500 (only employees can contribute)
- Contributions treated as Roth elective deferrals for employer-matching purposes, but employer contributions would go to regular defined contribution plan
Education
- 529 to Roth IRA Transfers (§126) – may roll up to $35k (lifetime limit per beneficiary) from 529 plan to Roth IRA (subject to certain requirements)
- Account must have been opened for at least 15 years
- Cannot transfer contributions/earnings from the past 5 years
- Annual transfer is subject to same Roth IRA contribution limits and earned income requirement, BUT it is not subject to income limitations
- Note: There is a grey area regarding whether a change in beneficiary “resets” the 15-year clock; this is pending further guidance
- Matching student loan payments (§110) – employers may offer the option to provide matching contributions to retirement plans for student loan payments made (instead of employee elective deferrals) to increase accessibility to retirement savings for those with student loan debt
- Note: Employers are not mandated to offer this and the law does not require proof of payments from employees (although employers may institute their own rules regarding proof)
Effective Year: 2025
Retirement Accounts
- Higher catch-up limit to qualified plans for 60-63 year olds (§109) – increases catch-up contributions to the greater of $10,000 or 150% of regular catch-up amount (will be increased for inflation)
- Note: This will work in conjunction with high wage earner rule for Roth catch-up contributions that goes into effect in 2024
- Expanded coverage for part-time workers (§125) – reduces requirement from 3 to 2 years (with at least 500 hours of service) for 401(k) eligibility (and ERISA 403(b) plans)
- Auto-enrollment for newly established 401(k) & 403(b) plans (§101) – requires initial auto-enrollment of at least 3% (employees may opt out), but not more than 10%, with a 1% auto-increase up to at least 10%
- Small businesses with fewer than 10 employees and other certain entities are exempt
- Note: Applies to plans established after date of enactment (December 29, 2022), but does not go into effect until plan years beginning in 2025
Effective After 2025
Retirement Accounts
- Saver’s Match replaces Saver’s Credit (§103)
- Effective in 2027, for certain individuals (that meet income thresholds) who make retirement plan contributions, the federal government will make a matching retirement plan contribution (instead of tax credit) directly to the individual’s IRA or retirement plan for 50% (up to $2,000)
- Expanded ability for certain S-Corp owners to defer ESOP gain (§114)
- Effective in 2028, certain S-Corp owners may defer up to 10% of gain on the sale of stock to an ESOP if the proceeds are reinvested in Qualified Replacement Property (QRP) (generally US domestic investments). Currently, this provision (also known as a §1042 rollover) is only available to C-Corps
Sources:
https://www.pwc.com/us/en/services/tax/library/broad-bipartisan-pension-legislation-enacted.html
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a registered investment advisor. WCG Wealth Advisors and The Wealth Consulting Group are separate entities from LPL Financial.
Megan Wilsey is solely an investment advisor representative of WCG Wealth Advisors and not affiliated with LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. WCG Wealth Advisors, The Wealth Consulting Group nor LPL Financial provide legal, tax or accounting advice. You should consult your own tax advisor.
