President Biden signed the SECURE 2.0 Act into law on December 29th of 2022. This $1.7 trillion omnibus spending bill has over 100 provisions in the bill. We will look at 6 of these provisions that are most likely to impact you.
1. Increase in Required Minimum Distribution age
Currently, taxpayers are required to begin taking distributions from their retirement plans at age 72. This age was increased from 70 ½ to 72 with the passage of the first Secure Act in 2019.
Beginning January 1, 2023, the new required minimum distribution age is 73, and will increase to 75 on Jan. 1, 2033.
For anyone with a large amount of assets in tax-deferred accounts, this may help alleviate the tax and Medicare cost that can come with inflating your annual income in the early years of retirement. We see this as a positive provision in the bill, as it gives savers more control over their tax bill in retirement.
2. Higher catch-up limit for ages 50+
Under current law, employees who are age 50 or older are permitted to make catch-up contributions to a retirement plan to help accelerate retirement savings. In 2022, a 49-year-old employee could contribute up to $20,500 into a 401(k) plan, while a 50-year-old employee could contribute up to $27,000.
Beginning in 2025, the catch-up contribution limit will increase to $10,000 for workers age 60-63, and be indexed for inflation thereafter.
One caveat to this provision is that employees earning more than $145,000 in a calendar year will see their catchup contributions automatically deposited into a Roth account. Any reader of our content knows that we are big fans of the Roth IRA (previous content on Roth IRAs). However, this provision in the bill is not good, as it takes control away from savers. This bill forces retirement savers to put money into a Roth when they may be better off saving that money in a traditional tax-deferred account.
3. Withdrawals for certain emergency expenses
Under the current tax laws, any distributions from tax-deferred retirement accounts prior to the age of 59 ½ are subject to an additional 10% tax penalty. This means taxpayers in the 24% bracket that pull $1,000 out of their IRA will pay $3,400 in federal income tax (24% plus the 10% tax penalty).
Under the new provision, employees can withdraw emergency expenses for “unforeseeable or immediate financial needs relating to personal or family emergency expenses” without being subject to the 10% penalty.
Account holders can now make one penalty-free distribution per year, up to $1,000. And they have the option to repay it within three years. If they do not repay it within three years, the account holder must wait until the end of the 3 years to make another penalty-free withdrawal.
We see this as being a good, albeit small provision for retirement savers, as it gives them slightly more control over their financial situation.
4. Expanding automatic enrollment in retirement plans
For 401(k) and 403(b) plans that start after January 1, 2025, employees will be automatically enrolled in the company plan upon becoming eligible. Employees can opt out of the plan if they wish.
Employees who do not opt out of a new plan will begin contributing a minimum of 3%, and no more than 10% of their wages to their account each year. Each following year, the amount is increased until it reaches at least 10% but no more than 15%.
Any current 401(k) and 403(b) plans are grandfathered into the old legislation, meaning that employees will not begin automatic contributions in older plans.
Employees can elect out of the contributions, but it requires action to opt out. We see this as net-neutral to retirement savers. We agree with the spirit of the new legislation, as it essentially forces people to save, unless they take the action to opt out. But it’s a slight overreach of government power when the Federal government starts dictating to private companies what they must do with their retirement plans.
5. Contributing to student loan payments
Beginning in 2024, employees with student loan debt may have an additional incentive to pay off their student loans. With the Secure 2.0 Act, employers will be eligible to provide matching 401(k) contributions for an employee that makes a “qualified student loan payment.”
This means that a 401(k) eligible employee who is paying off student loan debt may have the benefit of an employer 401(k) match, provided they make regular payments to their student loans.
This is a positive component of the new legislation, as it puts more control into the hands of employers by empowering them with more tools to attract younger workers. It also helps younger workers grow their retirement savings when they pay off their student debt.
6. Saver’s Match
Currently, low-income earners who make contributions to retirement plans receive a credit paid on their tax return. The new policy, effective in 2027, removes the credit and replaces it with a federal contribution match that is deposited directly into the taxpayer’s retirement plan.
The match is 50% of retirement account contributions, up to $2,000 per individual. With this provision, the IRS is attempting to further incentivize retirement savings for low-income taxpayers. By adding to their retirement accounts, as opposed to an annual tax credit that would normally be spent as soon as the tax refund is received, this legislation is pushing savings over spending.
We see this as good legislation. Any time the government can use tax policy to encourage financial independence, it is a win for everyone!
The Secure 2.0 Act aims to eliminate some of the obstacles to retirement savings, but it still takes discipline and planning to achieve your financial goals and desires for a peace-filled retirement.
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