President Biden passed the $1.66 trillion Consolidated Appropriations Act on December 29, 2022. The SECURE Act 2.0 of 2022, which incorporates a variety of tax measures linked to retirement, is included in the 4,155-page law.

Let’s go through the highlights:

Automatic Enrollment in Retirement Plans

Employers that establish new retirement plans after December 29, 2022, will be obligated to automatically enroll employees in 401(k) and 403(b) plans at a rate of at least three percent, but no more than ten percent of qualifying salaries beginning in 2025.There would be an automatic 1% increase each year until the employee participant reached 10%. Employees would have the choice to opt out.

This new tax law does not apply to enterprises that have been in operation for less than three years. Established businesses with existing retirement plans, employers with less than ten employees, and religious / government programs are also excluded from this new regulation.

Starter 401k Plans: The new law permits businesses without retirement plans to establish starter 401k plans for tax years beginning after December 31, 2023. Workers would be automatically registered and required to contribute at least 3%. Workers above the age of 50 are eligible for catch-up payments.

Federal Match for Saver’s Credit

Lower to middle-income individuals who contribute to a regular IRA or 401(k) at work will be eligible for a 50 percent matching contribution of up to $2,000 from the federal government beginning in 2027. The government contribution will be sent immediately into their IRS or 401(k) account. To qualify for the match, savers must be 18 or older and give more than $100. Dependents, full-time students, and nonresident aliens (unless taxed as a resident) are ineligible. The match phase-out ranges from $41,000 to $71,000 for joint filers, $20,500 to $35,500 for single filers, and $30,750 to $53,250 for heads of households.

Emergency Savings Funds and 401k Withdrawals

Plans for Emergency Savings: Employers now can set up employee emergency savings programs that are connected to their retirement accounts. Employees would be allowed to donate 3% of their salaries, up to a maximum of $2,500, to the emergency fund.

401k withdrawals for personal emergencies: Employers can also provide a one-time withdrawal from their workers’ 401k plans. Employees would be allowed one (1) payout each calendar year, up to a maximum of $1,000. This tax measure will become effective in 2024.

Student Loan Payments Count as Retirement Contributions

Employees who make student loan payments to loan servicers will be eligible for employer matching payments to a retirement plan beginning in 2024, even if they don’t make their own contributions.

Part-time Workers

Part-time employees will be allowed to enroll in their employer’s 401(k) retirement plans after two years, rather than three, beginning in 2025. (SECURE Act 2.0, 2019). Each 12-month period in which the employee works more than 500 hours is considered a year of labor.

IRA Catch-up Contributions

Inflation adjusted. The $1,000 catch-up contribution amount will be adjusted to inflation for taxable years starting after December 31, 2023, with sums rounded down to the nearest multiple of $100.

Higher catch-up contributions. Catch-up contributions for workers aged 60, 61, 62, and 63 will be increased to $10,000 or 150 percent of the standard catch-up amount for that year, whichever is larger, beginning in taxable years after December 31, 2024. Cost-of-living adjustments will be implemented for years beginning after December 31, 2024.

Required Minimum Distributions (RMDs) Increase to Age 73

People who turn 72 after December 31, 2022 and 73 prior to January 1, 2033 are eligible to begin RMDS at the age of 73. The relevant age for persons turning 74 after December 31, 2032 is 75.

In summary: RMDs will commence at the age of 73 for taxpayers born between 1951 and 1959. Those born in 1960 or after will start receiving RMDs at the age of 75.

Roth IRAs

New Roth 401k Regulations. Employers can allow employees to select between a corporate match in a Roth 401k and a conventional 401k beginning January 1, 2023. Employer matching contributions must be made into a normal 401k under existing law, even if taxpayers contribute to a Roth 401k.

Elimination of RMDs for Roth 401ks.  RMDs for Roth IRAs in eligible employer plans are no longer required beginning in 2024. While Roth IRAs are not liable to RMDS, Roth 401ks are, which means that distributions should be taken at the age of 72. (although they are tax-free).

Catch-up Contributions for Higher Earners. Catch-up payments for employees aged 50 and above earning more than $145,000 should be made into a Roth retirement account rather than a standard pretax retirement plan such as a 401k beginning in 2024. Starting in 2025, the $145,000 barrier will be updated for inflation and rounded down to the lowest multiple of $5,000.

Special Rules for 529 rollovers. Beginning in 2024, 529 college savings programs that have been in place for at least 15 years can be rolled over to a Roth IRA. Contributions to the 529 plan (and returns on those contributions) made during the past 5 years are not admissible. The rollover must be from trustee to trustee, and there is a lifetime maximum of $35,000 per account beneficiary.

New Rules for Qualified Charitable Distributions (QCDs)

Beginning in 2024, the maximum yearly amount an individual donor can provide each calendar year (currently $100,000) will be linked to inflation. QCDs, as a reminder, are direct distributions from an IRA to a qualified charity that contribute toward meeting required minimum distributions (RMDs) for the year if certain conditions are followed.

Help is Just a Phone Call Away

If you have questions about any tax provisions in the SECURE 2.0 Act of 2022, or any other tax-related topic, do not hesitate to contact the office.