In late December 2022, the SECURE Act 2.0 was passed. SECURE stands for Setting Every Community Up for Retirement Enhancement and this act is predominantly focused on enhancements to retirement programs.
Catch Up Contributions
For taxpayers 50 years and above, catch up contributions are allowed as an additional amount to fund retirement accounts. The SECURE Act 2.0 has made the following changes to catch up contributions:
IRA: $1,000 IRA catch up contribution will be indexed for inflation starting in 2024 for taxpayers 50 and older.
401(k) & Employer Provided Plans: The catch up is increased to the greater of 150% of the regular catch-up contribution ($7,500 in 2023) or for those aged 60-63 up to $10,000 starting in 2025. In 2026, this catch-up amount will be indexed for inflation.
SIMPLE: The catch up is increased to the greater of 150% of the regular catch-up contribution ($3,500 in 2023) or for those aged 60-63 up to $5000 starting in 2025. In 2026, this catch-up amount will be indexed for inflation.
Required Minimum Distributions (RMDs)
The current mandatory age for RMDs is 72. The SECURE Act 2.0 increases it to:
- Age 73, for taxpayers turning 72 after 2022, and
- Age 75, for taxpayers turning 74 after 2032.
Late RMD Penalties
The penalty imposed for failure to take the required RMD has been reduced from 50% to 25%.
Additionally, the tax is reduced to 10% if you file and pay the additional tax within the correction window, which is the following dates (all occurring after December 29, 2022):
- The date the IRS issues a notice of deficiency,
- The date the IRS assesses the excise tax, or
- The end of the 2nd taxable year after the shortfall occurred.
The SECURE Act 2.0 also eliminates the RMD requirement for Roth 401(k) accounts or other employer sponsored Roth accounts (to concur with the existing no RMD requirement for Roth IRAs).
SIMPLE and SEP ROTH IRAs
In 2023, SIMPLE IRAs are now able to accept Roth contributions.
Also beginning in 2023, SEP IRAs can now be designated as Roth SEP IRAs. However, it is important to note that any employer contributions to the Roth SEP IRA will need to be reported as taxable income on the individual’s return. Contributions to a traditional SEP IRA are still excluded from the employee’s taxable compensation.
Sec §529 Plan Rollovers to Roth Accounts
Starting in 2024, taxpayers who have maintained a §529 education account for at least 15 years can make a direct rollover to the beneficiary’s Roth IRA. However, there are limitations to the Roth rollover:
- The rollover will count towards the taxpayer’s annual IRA contribution limits ($6,500 for 2023), however the Roth contribution AGI (Adjusted Gross Income) limit does not apply to the rollover.
- The rollover amounts must come from the amounts contributed to the §529 plan before the 5-year period ending on the date of distribution (and their associated earnings).
- There is an aggregate lifetime limit of $35,000 per beneficiary.
Despite the limitations, it was lawmakers’ intention that this would encourage taxpayers to continue to make contributions to §529 plans to assist with rising higher education costs.
Matching Contributions to Roth 401ks
Effective December 29, 2022, employers offering 401(k), 403(b), and 457(b) defined contribution plans may now provide employees/participants with the option to receive matching contributions on a Roth basis (after-tax). Previously matching contributions could only be made to pre-tax plans. It is important to note that matching contributions to traditional 401(k) plans are non-taxable to the employee; however, choosing a matching Roth contribution will result in additional taxable income to the employee since Roth contributions are after-tax. Employees will need to check if their employer’s plan allows for the selection of matching Roth contributions.
Automatic Enrollment Mandates
Beginning in 2025, employers enacting new 401(k) or 403(b) plans are now required to automatically enroll employees with a minimum employee contribution rate of 3%. They must also provide employees an opportunity to opt out or choose a different contribution rate. Some states already have retirement plan mandates; you can read about California’s CalSavers’ Mandate here.
New Solo 401(k) Plans
Previously, 401(k) and Solo 401(k) plans must be enacted by December 31st of the tax year while contributions could be made up until the due date of the return, with extensions. The original SECURE Act of 2019 allowed employers to enact the new retirement plan by the due date of the business’s (or sole proprietor’s) tax return and allowed employer contributions until this date. SECURE Act 2.0 extends this and allows deductible employee contributions by the due date of the tax return (not including extensions).
As a reminder, the original 2019 SECURE Act, changed the distribution period for inherited IRAs. The IRS issued proposed regulations which may have a tax effect in 2023 (Notice 2022-53). This will require annual RMDs from inherited IRAs by non-spouse designated beneficiaries with the balance being withdrawn by the end of the 10th year period. Non-designated beneficiaries will also have an RMD, with the balance being withdrawn by the end of the 5th year period. These proposed regulations will apply to accounts inherited after December 31, 2019.
Early Withdrawal Penalty Exemptions
SECURE Act 2.0 has added additional exemptions from early withdrawal penalties:
- Qualified Long Term Care distributions
- Substantially equal periodic payments
- Domestic Abuse
- Terminal Illness
- Qualified public safety employees
- Presidentially declared disasters
- Emergency savings account distributions
- Corrective distributions of excess contributions
To discuss how these changes may impact you or your business, please reach out to a member of our firm.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and start-up/emerging growth companies. Building connections beyond the code.