New Retirement Strategies: The SECURE Act 2.0

There will soon be new retirement rules in place that will make it easier for Americans to accumulate retirement savings – and make it less costly to withdraw them. Collectively, the retirement savings provisions in that package are known as The Secure 2.0 Act.

Secure Act 2.0 will help increase savings, ensure greater access to workplace retirement plans, and provide more workers with an opportunity to receive a secure stream of income in retirement.

On December 29, 2022, President Biden signed the $1.7 trillion, 4,000+ page 2023 omnibus bill into law, which included the 350-page retirement-focused Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0. The new SECURE 2.0 makes multiple changes to individual and employer-sponsored retirement accounts to increase savings opportunities, expand Roth accounts, broaden annuity use in retirement plans, and create administrative consistency and simplicity.?

Here’s a look at seven of the Secure 2.0 provisions, based on a breakdown from the Senate Finance Committee.

1. Require auto-enrollment in 401(k) plans

The SECURE Act, passed in 2019, offered a tax credit to employers who added automatic enrollment to their 401(k) plans. SECURE Act 2.0 makes automatic enrollment in 401(k), and 403(b) plans mandatory for all new retirement savings plans starting in 2025. Although, employees have the option to opt out of their employer's plan if they choose.?

This Secure 2.0 provision will require employers to set a default contribution rate of at least 3% but not more than 10% for the employee, plus an automatic contribution escalation of 1% per year up to a maximum contribution rate of at least 10% but not more than 15%.?

With some exceptions for small businesses, the Act requires 401(k) and 403(b) plans to automatically enroll eligible participants, who will then be able to opt out of participation if desired.? However, certain exemptions must be noted, such as existing 401(k) and 403(b) plans being grandfathered in and exempt from this rule, as well as any new plans from small businesses with less than ten employees, churches, and governmental organizations.

Roth Employer Contributions

Starting in 2023, employers will have the option to allow employees to choose how employer contributions are made, either traditional pre-tax or Roth after-tax contributions. Historically, all employer contributions were made on a pre-tax basis, so even if you were contributing to your Roth 401(k), the employer contributions we always made on a pre-tax basis. This is an excellent opportunity for people in lower income tax brackets that don't necessarily need the tax deduction and provides more flexibility and tax savings opportunities in their retirement plan.

This provision will go into effect after December 31, 2024.?

401(k) Financial Incentives

The Secure Act 2.0 allows your employer to offer small financial incentives (e.g., low-dollar gift cards) to help boost employee participation in a workplace retirement plan. This provision will become effective for plan years after December 2022.

2. Allow employer contributions for student loan payments

When you have to pay down student loan debt, it makes it harder to save for retirement. Secure 2.0 now lets employers make a matching contribution to an employee’s retirement plan based on their qualified student loan payments. That would ensure the employee is building retirement savings no matter what.?

This provision is set to take effect after December 31, 2023.

Note: Student loan payments are on pause until at least June 2023 and student loan debt forgiveness is currently on hold due to court challenges.

Student Loan Payments Count as Elective Deferrals for Employer-Match Calculations

Anyone with significant student loan debt knows it can be hard to save for retirement when saddled with substantial student loan payments. To make matters worse, if you aren’t able to stock away for retirement, you’re leaving compensation on the table in the form of employer-match contributions. With SECURE 2.0, employers can count student loan payments as eligible contributions for matching retirement contributions starting in 2024. This change will benefit those actively repaying their student loans who want to make additional payments without sacrificing potential employer matches.

Roth Rollover Option for 529 Plans to Roth IRA?

Beginning in 2024, in limited circumstances (i.e., there are a lot of requirements that must be met including that the Roth IRA account must be in the name of the 529 plan beneficiary), some people may be able to roll over a 529 plan that they have maintained for at least 15 years to a Roth IRA.?Annual limits for the rollover would have to be within the annual contribution limit, and there will be a $ 35,000-lifetime limit on what can be rolled to the Roth IRA.

3. Increase the age for required minimum distributions (RMD)

Being forced to take required minimum distributions (RMDs) is the tax-deferred account feature that everyone loves to hate since paying taxes on the income you may not need is no fun. The below provisions provide planning opportunities to help you be as tax-efficient as possible.

It used to be that when you turned 70 1/2, you had to start withdrawing a required minimum amount from your 401(k) or IRA every year. As it stands right now, you must start taking RMDs from 401(k) accounts, traditional IRAs, and similar retirement savings accounts (other than Roth IRAs) in the year you turn 72 (although you have until April 1 of the following year to take your first RMD).? However, the SECURE 2.0 Act eventually pushes the age for starting RMDs to 75.

There's a two-step process under the SECURE 2.0 Act for increasing the age when RMDs become necessary.?

Step 1: Beginning in 2023, the age to start taking RMDs jumps from 72 to 73.?

Step 2: Beginning in 2033, it creeps up again to 75.

RMD Penalties

There are steep penalties for failing to take an RMD. If you miss an RMD or don't take enough out of your retirement account, you'll be hit with a 50% excise tax on the distribution shortfall. There is some penalty relief available, though. You may be able to avoid the additional tax if your failure to take an RMD was due to "reasonable error" (e.g., a serious illness) and you withdraw the necessary amount from your retirement account quickly. To ask for a penalty waiver, submit Form 5329 to the IRS as instructed and attach a statement explaining why you didn't take your RMD. The IRS will notify you if your request is rejected.

The current 50% tax is one of the heaviest penalties in the entire tax code, so it's no wonder legislators want to bring it down.

The SECURE 2.0 Act reduces the penalty to 25% in all cases. In addition, the penalty drops to 10% if you take the necessary RMD by the end of the second year following the year it was due.

So, for example, if you fail to take an RMD due in 2022, the penalty is knocked down to 10% if you withdraw the necessary funds by December 31, 2024. These penalty-reduction provisions apply beginning in 2023.

For some seniors, the SECURE Act 2.0 will also delay the start of the statute of limitations for assessing the penalty. For people who aren't required to file an income tax return for the tax year in question, the three-year limitations period starts on the date that an income tax return would have been due (excluding any extensions), instead of the date as a tax return for the year is actually filed, which can be later than the normal due date. By starting the clock sooner, some people might avoid the penalty if the IRS is slow in assessing it.

Excess Contributions Statute of limitations Reduced

A tax court decision in 2011 ruled that the statute of limitations for a missed RMD starts with filing Form 5329, the form used to report such mistakes. SECURE 2.0 makes it clear that the statute of limitations starts running with filing Form 1040 for the year the mistake was made. The statute of limitations for assessing penalties for excess contributions is still years. Still, it effectively shortens the time of enforcement, starting when the mistake was discovered to starting when the mistake was made.

The establishment Age for ABLE Accounts Extended to 46

ABLE accounts are tax-advantaged savings accounts for individuals with disabilities and their families. Under current law, ABLE accounts can be established for anyone who becomes disabled before age 26. Starting in 2026, SECURE 2.0 extends the age for establishing ABLE accounts to individuals who became disabled before age 46. With extended eligibility for individuals aged 26 or older, this is a critical opportunity for those with disabilities to better prepare for the future.

4. Help employees build and access emergency savings

Beginning in 2024, under the SECURE 2.0 Act of 2022, you will be allowed to take an early “emergency” distribution from your retirement account to cover unforeseeable or immediate financial needs. Normally, if you tap your 401(k) before age 59 1/2, you must not only pay taxes on that money but also pay a 10% early withdrawal penalty.

For employees dissuaded from saving money in a tax-deferred retirement plan because it would be too complicated and costly to access for emergencies, Secure 2.0 may assuage that fear: It will let employees make a penalty-free withdrawal of up to $1,000 a year for emergencies. While employees would still owe income tax on that withdrawal in the year it’s made, they could get that tax refunded if they repay the withdrawal within three years.

This provision will go into effect after December 31, 2023.

That emergency distribution of up to $1,000, could only be taken once during the year, but won't be subject to the usual additional 10 percent tax that applies to early distributions. But if you choose not to repay the distribution within a certain time, you won't be allowed to take other emergency distributions for three years. If they don’t repay the withdrawal, they would have to wait until the three-year repayment period ends before being allowed to make another emergency withdrawal.

Retirement Plan-Linked Emergency Savings Accounts

SECURE 2.0 creates a new benefit designed to help individuals save for emergency expenses with “Emergency Savings Accounts” that are linked to existing employer retirement plans. This benefit is only available for non-highly compensated employees, defined as individuals who own less than 5% interest in the business and whose compensation was, at most, $135,000 the previous year (2023). This new benefit is effective immediately and allows employees to save up to $2,500 each year, with anything an employer contributes being treated as Roth contributions. Employers can set a lower maximum limit on contributions if they prefer.

403(b) Withdrawals

Other hardship withdrawals are provided for in SECURE Act 2.20 including for 403(b) plans. (Currently, distribution rules for 403(b) and 401(k) plans are different, so SECURE 2.0, 2022, would conform to those rules.)

Penalty-Free Withdrawals (Significant Expansion of Available Exceptions)

These exceptions are effective immediately unless otherwise indicated:

• Qualified Disaster Recovery Distributions: If an individual’s primary residence is in a federally declared disaster area, they may withdraw up to $22,000 penalty-free if done within 180 days of the disaster. This provision applies retroactively to all disasters that occurred on or after January 26, 2021.
• Terminal Illness: To qualify, an individual has to have been certified by a physician as having an illness or condition which can “reasonably be expected to result in death” in 84 months. Distributions may be repaid within three years.
• Victims of Domestic Abuse: An individual that self-certifies that they are a victim of domestic abuse may withdraw up to $10,000 or 50% of the vested balance, whichever amount is lower. This takes effect in 2024.
• Qualified Long-Term Care Distribution: Qualified retirement plans are eligible to distribute up to 10% of their balance or $2,500 (adjusted for inflation) per year to pay for premiums for certain long-term care (LTC) contracts. Distributions are taxable but exempt from the 10% early distribution penalty. This takes effect in 2026.
• Age 50 Exceptions: The Age 50 Public Safety Worker Exception has allowed an exception to the 10% early withdrawal penalty for public safety workers who separate from service in the year they turn 50 or older. Effective immediately, the Age 50 Exception will be extended to include:
• Private-sector firefighters
• State and local corrections officers
• Qualifying workers with 25 or more years of service for the employer sponsoring the plan

5. Raise catch-up contribution limits for older workers

Beginning in the tax year 2024, the $1,000 IRA catch-up contribution limit will be indexed for inflation annually in $100 increments. This means that if you are over age 50, you can take advantage of this increase to save even more as you near retirement. Currently, if you’re 50 or older, you may contribute an additional $6,500 to your 401(k) on top of the $20,500 annual federal limit in effect this year.

Under the retirement package, instead of $6,500, starting in 2025, individuals aged 60-63 who are contributing to a 401(k), 403(b), or 457(b) plan will be permitted to make catch-up contributions of up to the larger of either $10,000 or 50% more than the regular catch-up amount.

This provision takes effect after December 31, 2024.

To help pay for the cost of the retirement package, however, another provision, which will go into effect a year earlier, will require anyone with compensation over $145,000 to “Rothify” their catch-up contributions. So, instead of making before-tax contributions up to the catch-up limit, you may still contribute the same amount, but you will be taxed on it in the same year. Your contribution will then grow tax-free and may be withdrawn tax-free in retirement. But the federal government will get the tax revenue from the original catch-up contribution upfront.

Roth Catch-Up Contributions

Also, beginning in 2024, SECURE 2.0 Act rules impact how eligible workers with incomes over $145,000, make catch-up contributions. (The income threshold will be adjusted for inflation) Suppose you are ready to start making catch-up contributions in your employer-sponsored plan and are a high-wage earner, SECURE 2.0 limits where your catch-up contributions can go. Beginning in 2024, high-wage earners must make catch-up contributions to a Roth plan, like a Roth 401(k). A high-wage earner is an individual whose wages exceed $145,000 the preceding year (indexed for inflation).

RMDs for Roth 401(k) Accounts

There are no RMDs for Roth IRAs. However, RMDs are currently required for Roth 401(k) accounts. You can get around the Roth 401(k) RMD rules by rolling over the money into a Roth IRA. But watch out for the Roth IRA five-year rule – if you're not careful, you may have to wait five years to pull your money out of the Roth IRA.

The SECURE 2.0 Act does away with the need to roll over funds from a Roth 401(k) to a Roth IRA. Instead, as with Roth IRAs, Roth 401(k) accounts won't be subject to the RMD rules before the account holder dies. (Post-death minimum distribution rules, which also apply to Roth IRAs, still apply.) This change generally kicks in starting in 2024; however, an exception applies to RMDs required before 2024 but not required to be paid until January 1, 2024, or later.

6. Enhance and simplify the Saver’s Credit

The Saver's Credit helps lower- and middle-income Americans who contribute to a retirement plan by cutting up to $1,000 ($2,000 for married couples) off their tax bill when they file their annual tax return. It's also a particularly good incentive to get young people started early on saving for their golden years. But the Saver's Credit as it exists today is in for some significant changes – particularly with respect to how it's paid.?

Beginning in 2027, the SECURE 2.0 Act of 2022 replaces the nonrefundable Saver’s Credit for certain IRA and retirement plan contributions with a federal matching contribution, called the "Saver's Match," that is deposited into your IRA or retirement plan. An underutilized federal match exists for lower-income earners’ retirement contributions of up to $2,000 a year per person. However, some income limits, and phase-outs, will apply.

The new package enhances and simplifies the so-called Saver’s Credit, so more people can use it. Eligible filers (e.g., married couples making $71,000 or less) will get a matching contribution from the federal government worth up to 50% of their savings, but the match cannot exceed $1,000.

This provision goes into effect after December 31, 2026.

7. Make it easier for part-time workers to save

Part-time workers currently must be allowed to participate in a workplace retirement plan if they have three years of service and work at least 500 hours a year. The new package reduces that service time to two years. Some of those provisions involve everything from part-time worker access to employer retirement plans, and small business tax credits, to contributions to SIMPLE, and SEP plans. Individuals with a SIMPLE Plan can contribute up to the larger of $5,000 or 50% more than the standard catch-up amount in effect in 2024. The catch-up contribution amounts will be indexed for inflation after 2025. Other provisions address issues surrounding stock ownership and savings bonds.

This provision takes effect after December 31, 2024

Starting in 2023, self-employed individuals will have more flexibility to set up and put money into a Solo 401(k). An employer may establish a new 401(k) plan after the end of the taxable year but before their tax filing date, and treat the plan as having been established on the last day of the taxable year. Employer contributions can fund such plans up to the employer's tax-filing date. Additionally, SECURE 2.0 allows Solo 401(k) plans to receive employee contributions up to the date of the employee’s tax return filings, excluding extension periods.

Expanded Income Annuity Options in Qualified Accounts

Holding income annuities in qualified plans and IRAs has been administratively challenging, thanks to several IRS regulations related to RMDs. Effective immediately, thanks to SECURE 2.0, the following benefits/features will not trigger a violation of RMD rules:

• Guaranteed annual income payment increases, not to exceed 5%
• Lump-sum payments that result in the shortening of the payment period, such as structured settlement that pays out a lump sum in lieu of future payments
• Accelerations of payments that would otherwise be payable in the next 12 months
• Dividend-like payments to annuity owners
• Offering Return-of-Premium (ROP) death benefits

Other Retirement Plan Changes in SECURE Act 2.0

There are a few more notable changes as part of SECURE 2.0 that don’t fit into the above categories, but we want to draw some brief attention to them here:

• Reduced service requirement for part-time workers to be eligible for automatic enrollment in employer plans from three years to two years. Effective in 2025.
• Family attribution rules for employer aggregation apply without regard to any community property. Effective in 2024.
• Termination distribution of employer accounts without employee consent increased from $5,000 to $7,000. Effective in 2024.
• Permit 403(b) sponsors to participate in multiple employer plan (MEP) arrangements. Effective in 2023.
• Meaningful enhancements to employee stock ownership plans (ESOPs), including expanded gain deferral provisions and ESOP eligibility rules. Effective in 2028.
• SEP eligibility for household employees. Effective in 2023.
• New rules limit "abusive" conversation easements by denying tax deductions if the amount of the conservation contribution is 2.5x the owner’s basis. Effective retroactively in 2022.

New Distribution Options in SECURE 2.0

Enhanced Qualified Charitable Distributions

Qualified Charitable Distributions (QCDs) are set to undergo significant changes. In 2024, the $100,000 ordinary contribution limit will be indexed for inflation. In addition, individuals can make a one-time $50,000 distribution in cash or certain assets to one or more charitable gift annuities, charitable remainder trusts (CRUTs), or charitable remainder annuity trusts (CRATs). With this added flexibility and forward-thinking, you can maximize your tax benefits while supporting your favorite causes

New Beneficiary Option for Surviving Spouses

From 2024 onward, the new beneficiary option for surviving spouses is significant in its ability to provide asset protection. This option enables a surviving spouse to choose to be treated as their deceased partner's qualified plan participant, meaning they are afforded all the safeguards and protective measures of ERISA. The clear benefit here is that an employer-employee relationship bolsters financial security against loss or liability. This will ensure that surviving spouses can manage their assets with peace of mind and remain protected, even when their partner passes away. This new provision promises to make a world of difference for those who take advantage of it.

Retirement Tax Relief for Disabled First Responders

Starting in 2027, disabled first responders will have the opportunity to receive a tax-free retirement pension, building off of current disability pensions. This change is expected to apply retrospectively and prospectively, with a pro-rata attribution granted for those already receiving disability pensions. With the retirement of many of these brave individuals on the horizon, they must get the support they need as they transition into this new chapter of their lives. The tax-free retirement pension will provide valuable assistance towards ensuring their livelihoods are secure, even after their service ends.

72(t) SEPP Safe Harbor

The 72(t) Substantially Equal Periodic Payments (SEPP) Safe Harbor, effective in 2023, promises to bring great new benefits to those choosing to use its annuity payment calculation method. This innovative method is aimed at providing the best possible value when it comes to calculating and preserving retirement funds. Closely observing IRS regulations, this new safe harbor is expected to make a sizable difference in protecting the financial security of those looking for assurance that their money will continually be distributed as they transition into their golden years.

72(t) SEPP Partial Rollovers Permitted

Under current law, if an individual rolls over a portion of a 72(t) SEPP account, it triggers full taxability on the entire account. Under SECURE 2.0, starting in 2024, individuals can roll over only a portion of funds from an existing SEPP plan so long as the originally determined distribution schedule continues to occur.

Sources

Jeanne Sahadi, CNN Business, December 23, 2022 / Brian Vnak,? Jan 10, 2023 / Kelley R. Taylor, Jan 3, 2023 / Rocky Mengle, Dec 2022

?Reach out to our financial advisor today to learn more about SECURE Act 2.0 and what this might mean for you and your retirement planning ?? https://calendly.com/communityworkshop/zoom-appointment