In our January article, we talked about some of the tax law changes coming in 2023. Days before the end of the year, the SECURE 2.0 Act of 2022 passed the congress with bipartisan support and was signed by the president. The bill contains many provisions that are intended to strengthen the country’s retirement savings. This month we’ll discuss some of the highlights of this important piece of retirement-tax legislation.
Automatic Opt In
The act requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter, that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent. All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than 3 years), church plans, and governmental plans. These rules are effective for plan years beginning after December 31, 2024.
RMD Age Increased
The age to begin required minimum distributions has been 72. This bill increases the RMD age to 73 starting on January 1, 2023 – and increases the age further to 75 starting on January 1, 2033.
Catch-up Contributions Indexed
Last month’s article discussed an increase in the catch-up contribution limit by $1,000 to $7,500. This new act indexes future limits to the IRS cost-of-living-adjustment (COLA) and is effective for taxable years beginning after December 31, 2023.
Emergency Expenses
Generally, an additional 10 percent tax applies to early distributions from tax-preferred retirement accounts, such as 401(k) plans and IRAs, unless an exception applies. This bill provides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within 3 years. No further emergency distributions are permissible during the 3-year repayment period unless repayment occurs. This provision is effective for distributions made after December 31, 2023.
529 Plan Rollovers
The legislation amends the Internal Revenue Code to allow for tax-free and penalty-free rollovers from 529 accounts to Roth IRAs, under certain conditions. Beneficiaries of 529 college savings accounts would be permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years.
In addition to emergency withdrawals from a 401(k) plan, the act provides employers with the option to offer to their non-highly compensated employees a pension-linked emergency savings account. Employers may automatically opt employees into these accounts at no more than 3 percent of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer). The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or their IRA.
The legislation covers a lot more – such as additional changes to 403(b) plans, long-term care funding and student loans. To see which provisions apply to your situation, or to discuss any other financial matters, we can set up a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.