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SECURE ACT 2.0 Retirement Plan and Income Tax Changes

President Biden signed the Consolidated Appropriations Act into law on December 29, 2022. This bill was about more than just government spending provisions. It also contained the Securing a Strong Retirement Act (SECURE 2.0) which was a follow up to the original SECURE Act passed in 2019.

SECURE 2.0 updates many provisions related to retirement plans and retirement plan distributions. The revisions take effect over the next few years. Some of the key changes include:

Change in Required Minimum Distribution Timing. The required minimum distribution age will increase to 73 in 2023 (so, there is no required distribution for those folks who turn 72 this year) and to 75 in 2033, for those that turn 74 after December 31, 2032. In 2022, you had to begin taking distributions from retirement accounts beginning at age 72.

Catch-Up Contribution Changes. Currently, individuals age 50 and over can contribute an additional $7,500 annually to a Section 401(k), 403(b) or 457(b) pension plan. Beginning in 2025, individuals between the ages of 60 and 63 will have a higher catch-up contribution limit, equal to the greater of $10,000 or 50% more than the regular catch-up amount for 2024 (2023 - currently $7,500.)

The annual dollar limit for catch-up contributions to SIMPLE plans for individuals age 50 and older is $3,500 for 2023. Beginning in 2025, individuals between the ages of 60 and 63 will have a higher catch-up contribution limit, equal to the greater of $5,000 or 50% more than the regular catch-up amount for 2024 (2023 - currently $3,500.).

Also, starting in 2024, for those that make more than $145,000 in earned income from the prior year, catch-up contributions for taxpayers age 50 or older will be required to be designated as Roth contributions. This rule does not apply to SEPs or SIMPLE plans.

The IRA catch-up amount for individuals age 50 and older (currently $1,000) will be indexed for inflation beginning in 2024.

Failing to Take a Required Minimum Distribution (RMD) - Penalty Reduction. Prior to 2023, if you forgot to take your RMD or you took less than the required amount, you could be assessed a penalty equal to 50% of the shortfall. For RMDs shortfalls for 2023 and future years, the penalty is reduced to 25% of the shortfall. In certain circumstances, an even lower 10% penalty could apply.

Exceptions to the 10% Early Withdrawal Penalty. Current tax laws allow for penalty free early withdrawals out of pension plans and IRAs if the funds are used for certain purposes. Such distributions are generally still subject to income taxes when withdrawn. SECURE 2.0 added several new exceptions to the 10% early withdrawal penalty:

  • Beginning in 2024, victims of domestic abuse may withdraw the lesser of 50% of the account value or $10,000 (adjusted for inflation) penalty-free.

  • A “qualified disaster recovery” distribution of up to $22,000 made within 180 days of a federally declared disaster to an individual whose principal residence was in the disaster area and who sustained an economic loss from the disaster. These distributions are included in income ratably over a three-year period. This penalty exception applies to distributions made with respect to disasters occurring on or after 1/26/21.

  • A distribution of any amount for an individual with a terminal illness. For this purpose, a terminal illness means an individual who has been certified by a physician as having an illness expected to result in death in 84 months or less. This penalty exception applies to distributions made after 12/29/22.

  • Beginning in 2024, a distribution of up to $1,000 for personal or family emergency expenses. Only one emergency penalty free distribution is allowed per year. Further emergency distributions are disallowed in the subsequent three years unless the distribution is repaid.

  • Participants of 401(k), 403(b) and 457(b) plans will be able (starting December 29, 2025) to withdraw funds to pay for qualified long-term care insurance premiums. Withdrawals are taxable but are exempt from the 10% early withdrawal penalty and will be limited to the lesser of the actual premium paid, 10% of the account balance or $2,500.

Mandatory Pension Participation for Employees of Certain Employers: Effective for years after 12/31/2024, employers with more than 10 employees, in existence for three years, and that offer a 401(k) or 403(b) plan, must provide automatic enrollment for participants at a contribution rate of 3%. The individual employee contribution rate increases annually by 1% until it reaches at least 10%. An employee may elect out of participation in this type of plan.

Expanded Pension Coverage for Part-Time Employees: Starting with plan years beginning after 12/31/2024, employees who work between 500 and 999 hours for two consecutive years will be allowed to participate in the company’s retirement plan.

Matching Contributions and Student Loans: Beginning in 2024, employers are allowed to add a provision to their plans (401(k), (403(b), governmental Sec 457 and Simple IRAs) to make employer matching contributions for employees who are using their money to pay off student debt as opposed to contributing the money to their retirement accounts. The student loan payments count as employee contributions for employer matching purposes. Employers can rely on an annual employee certification as to the amount of student loan payments made.

Emergency Savings Option in Pension Plans: Starting with plan years beginning in 2024, employer retirement plans can be linked to “emergency savings accounts” which allow non-highly compensated employees to make after tax contributions to a savings account. The balance in the emergency account must be eligible for distribution at least once a month and can be withdrawn tax free, without penalties. The maximum withdrawal for an emergency is $1,000 and the account balance cannot grow to more than $2,500. When employees leave an employer, they can take the amount in the account as cash or roll the balance into a Roth IRA.

Saver’s Tax Credit Changed to a Matching Contribution: Starting in 2027, lower-income taxpayers can receive a federal matching contribution of up to $1,000 per year deposited to their retirement account. The match is equal to 50% of the taxpayer’s contributions but phases out completely at incomes of $71,000 married filing joint taxpayers and $35,500 for single taxpayers.

Tax Credit: For employers with 50 or fewer employees, in tax years beginning after December 31, 2022, the credit for starting a retirement plan is increased to 100% of the administrative costs and can be up to $5,000. This credit is available for the first three years of the employer plan. There is an additional tax credit of up to $1,000 per employee for all or a portion of employer contributions made for employees earning less than $100,000 during the first five years of the plan. This additional credit phases out over the first five years of the plan. This additional credit is available for employers with 100 or fewer employees.

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