Understanding the SECURE Act 2.0: What You Need to Know for 2023 and Beyond

As retirement planning continues to evolve, so do the laws that govern how we save, invest, and plan for our future. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was a significant step forward, but the passage of the SECURE Act 2.0 in 2022 has introduced even more changes aimed at improving retirement security for Americans. These changes are not only crucial for retirement planning but also play a significant role in your overall tax planning strategy.

This will be mostly a review for those of you who attended our webinar earlier this year, but it’s important to note that the SECURE Act 2.0, effective at the end of 2022, brought several significant changes, some of which were effective last year. Understanding these updates can provide valuable insights for both your retirement and tax planning efforts.

Most of the updates are centered around changes in retirement plan rules, particularly those aimed at increasing flexibility and making it easier for taxpayers to contribute to various Roth retirement accounts. This additional flexibility is particularly important for high-income taxpayers who generally cannot contribute directly to a Roth IRA. However, they can take advantage of what’s commonly referred to as a “backdoor Roth IRA,” which allows funding a traditional IRA and then converting it to a Roth.

It’s worth noting that while this strategy is currently available, it’s uncertain how long this loophole will remain in existence. There are also a few considerations to be aware of when converting to a Roth, as doing so might trigger unintended income tax consequences. Therefore, it’s crucial to consult with a knowledgeable advisor to ensure you’re handling these conversions properly, which is a key aspect of effective tax planning.

Effective in 2023: Key Changes Under SECURE Act 2.0

 

The SECURE Act 2.0 also introduced several new provisions that took effect in 2023, including:

  • Charitable contribution deduction for certain conservation easements limited to 2.5 times: This change limits the amount that can be deducted for certain conservation easements, helping to prevent potential abuse of charitable contribution deductions.
  • The required minimum distribution (RMD) age rises: The age at which individuals must start taking RMDs increases from 72 to 73 in 2023, and further to age 75 in 2033. This provides more time for retirement savings to grow before distributions are required. You can review the IRS RMD guidelines here.
  • Penalty for missed RMDs decreases: If you miss taking your RMD, the penalty has decreased from 25% to 10% if corrected within two years, offering some relief for those who inadvertently miss this requirement. For more details on RMD rules and penalties, visit the IRS page on RMDs.
  • Employer matching and non-elective contributions to a 401(k), 403(b), or 457(b) plan: These contributions can now be made as Roth contributions, provided the employee is 100% vested when the contributions are made, adding flexibility for both employers and employees.
  • Solo 401(k) contributions: Sole proprietors can now make solo 401(k) deferrals up to the due date (without extension) of their individual tax return, giving them more time to contribute. For guidance on small business retirement plans, visit the Department of Labor’s Retirement Plan Guide.
  • Financial incentives for elective salary deferrals: Employers can offer modest financial incentives, such as gift cards, to encourage employees to make elective salary deferrals.
  • Roth options for SIMPLE IRAs and SEP IRAs: Roth options are now available for SIMPLE IRAs and SEP IRAs, broadening the availability of Roth accounts to more retirement savers. Learn more about Roth IRA contribution limits and rules from the IRS.
  • Charitable distributions from IRAs: Distributions from IRAs can be made directly to charities up to $100,000/year and up to $50,000 to Charitable Remainder Annuity Trusts (CRATs), Charitable Remainder Unitrusts (CRUTs), or Charitable Annuities. For more information, check out Fidelity’s Qualified Charitable Distribution (QCD) Guide.
  • Penalty-free distributions for specific life events: Individuals can take penalty-free distributions of up to $5,000 from retirement plans for qualified birth, adoption, or domestic abuse, providing important financial flexibility in challenging situations. More about penalty-free withdrawals from retirement accounts can be found on Investopedia.

 

Additional Requirements and Flexibilities Introduced in SECURE Act 2.0

There are also some additional requirements and flexibilities introduced under the SECURE Act 2.0 that are important to note:

  • Catch-Up Contributions for Highly Paid Employees: If you’re a highly compensated employee and over certain income limits, any catch-up contributions you make will be required to be treated as Roth contributions, not tax-deferred contributions. This shift emphasizes the growing focus on Roth accounts within retirement planning and has significant implications for tax planning. Read more about Roth 401(k) catch-up contributions and how this can affect your tax planning.
  • Emergency Access to Retirement Funds: The Act introduces more flexibility for accessing retirement funds in emergencies, making it easier for individuals to tap into their savings when they need it most without facing severe penalties.
  • 529 Plan Rollover to Roth IRA: If you have accumulated money in a 529 plan that you no longer need for a child’s education, the SECURE Act 2.0 allows you to roll that money over gradually into a Roth IRA, tax-free, provided no 529 contributions have been made in the last five years. This change adds a layer of flexibility in managing education savings that may no longer be needed, which is another important element in your tax planning toolkit. Find more details on this from the IRS.

As you can see from these changes, Congress is encouraging taxpayers to make contributions to Roth accounts. The policy behind this is clear: Congress gets to collect more income tax currently in exchange for giving up the ability to tax distributions later from what would otherwise be tax-deferred retirement accounts. Effective tax planning will involve understanding how these changes impact your overall retirement strategy and adjusting accordingly.

Effective in 2024: More Key Changes Under SECURE Act 2.0

Looking ahead, the SECURE Act 2.0 will bring even more changes in 2024, including:

  • No RMDs Required from Roth 401(k)s and Roth 403(b)s: Starting in 2024, individuals will no longer be required to take RMDs from Roth 401(k) and Roth 403(b) accounts, which aligns these accounts more closely with Roth IRAs.
  • Mandatory Roth Treatment for Catch-Up Contributions: For employees earning more than $145,000 (indexed for inflation), catch-up contributions made to 401(k), 403(b), and 457(b) plans must be treated as Roth contributions, providing no upfront tax deduction but offering tax-free withdrawals in retirement.
  • Employer Matching for Student Loan Payments: Employers can now match student loan payments in 401(k), 403(b), and 457(b) plans, helping employees who are paying off student loans build retirement savings simultaneously.
  • Emergency Distribution Flexibility: The 10% penalty will no longer apply for emergency distributions of up to $1,000, and these funds can be repaid within three years, providing more options for those facing unexpected financial challenges.
  • Emergency Savings Accounts within Retirement Plans: A 401(k), 403(b), or 457(b) plan can allow a non-highly compensated employee to defer up to the lesser of 3% of compensation or $2,500 into an emergency savings account, adding a layer of short-term financial security.
  • 529 Plan Rollover to Roth IRA: 529 plans that have been in existence for at least 15 years can roll over any unused money into a Roth IRA for the plan’s beneficiary. This rollover is tax-free, provided no contributions have been made in the last five years and the rollover amount does not exceed the annual Roth IRA contribution limit.

Looking Ahead: Catch-Up Provisions and Auto-Enrollment Changes Starting in 2025

Starting next year, a couple of additional changes pursuant to the SECURE Act 2.0 will come into play:

  • Increased Catch-Up Contributions: The catch-up contributions to 401(k) and 403(b) plans will increase from $7,500 to $10,000, and to $5,000 for SIMPLE plans. However, this increase only applies to taxpayers or investors who are between the ages of 60 and 63. It’s a bit curious that this provision is cut off at age 63, as you might expect that catch-up provisions would be available for those funding their retirement even later in life. Nevertheless, for those within this 60 to 63 age window, this change allows for additional contributions. For a full overview of Roth IRA contribution rules, visit the IRS page on Roth IRAs.
  • Automatic Enrollment in Retirement Plans: For small employers, there are new requirements to automatically enroll employees in retirement plans, though employees can opt out if they choose. Essentially, the default rule is that everyone is included unless they opt out. This change is likely to impact those of you who either have 401(k) or 403(b) plans or are employers offering these plans. For small business retirement plan guidelines, refer to the Department of Labor’s guide on retirement plans.

These upcoming changes reflect Congress’s ongoing efforts to encourage retirement savings and ensure more Americans are prepared for retirement. Whether you are an individual saver or an employer offering retirement plans, staying informed about these developments is essential for making the most of your retirement planning strategy and ensuring effective tax planning.

Effective in 2025: What’s Next Under SECURE Act 2.0

Looking further ahead, 2025 will bring additional changes under the SECURE Act 2.0, designed to enhance retirement savings opportunities and further encourage participation in retirement plans. Key provisions effective in 2025 include:

  • Increased Catch-Up Contributions: For investors aged 60 through 63, the catch-up contribution limits to 401(k) and 403(b) plans will increase from $7,500 to $10,000 per year. For SIMPLE plans, the limit will rise to $5,000 per year. These amounts will be indexed by inflation thereafter, allowing for continued growth in savings as retirement approaches.
  • Automatic Enrollment Requirements for Certain Employers: Employers with fewer than 10 employees or those in business for less than three years who start retirement plans after December 29, 2022, will be required to automatically enroll employees in the plan and contribute a minimum of 3% of their salary, with contributions potentially rising up to 10%. However, employees retain the option to opt out of the plan. The default contribution amount will increase by 1% each year until it reaches the maximum.
  • Long-Term Care Insurance Premiums: Retirement plans will be permitted to distribute up to $2,500 annually to participants to pay for long-term care insurance premiums. This provision offers a new way for individuals to use their retirement savings to secure long-term care coverage, adding an important layer of financial protection as they age.

If you’d like to learn more about how the SECURE Act 2.0 could impact your retirement or tax planning strategy, we invite you to reach out to our team. Schedule a FREE introductory call through our Contact Us page and let us help you navigate these important changes to maximize your financial future. We’re here to ensure you have the information and guidance you need to make informed decisions.

 

 

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. Provident CPAs assumes no responsibility for actions taken based on the information provided in this post.