The SECURE Act 2.0 and How it Affects Retirement Plans

Published on January 19, 2023

In December 2022, President Biden signed the $1.7 trillion omnibus spending bill. Bundled into it is the SECURE Act 2.0 retirement reform package, which includes provisions that will affect the retirement industry and increase the savings potential for many Americans. Most of the 100+ provisions do not go into effect until January 2025, but some affect plan sponsors and account owners now.

Here’s a recap of need-to-know SECURE Act 2.0 provisions that are designed to help close Americans’ retirement gap (financial readiness to retire) and help provide more opportunities and ways to build retirement savings.

RMD age is higher

Uppermost in account owners’ minds is likely to be the higher age at which required minimum distributions must start from pre-tax retirement accounts. The first SECURE Act, passed in 2020, pushed the RMD age to 72. Starting on January 1, 2023, the RMD age is now 73 years old. This will get pushed up again in 2033 to age 75. Taxpayers who turned 72 years old last year (2022) must still take minimum distributions. RMDs apply to all pre-tax retirement accounts (such as Traditional IRAs), but not after-tax retirement accounts (such as Roth IRAs). As always, we recommend you discuss your RMD strategy with your trusted advisor, as everyone’s financial needs and tax scenarios differ.

RMDs and Roths

Unlike a Roth IRA, a Roth 401(k) is subject to RMDs. The SECURE Act 2.0 eliminates RMD requirements for workplace-based Roth plans beginning in 2024. Therefore, Roth 401(k)s will be treated similarly to Roth IRAs regarding required minimum distributions (in other words, no more RMDs for workplace Roth accounts starting next year).

Roth accounts for SIMPLE and SEP retirement plans

Effective now, employers may create Roth accounts, open to after-tax contributions, for SIMPLE and SEP retirement plans, which previously only allowed for pre-tax contributions.

Increased catch-up contributions

Catch-up contributions to retirement plans are for people ages 50 and older, who may contribute amounts above the typical annual contribution limits.

• Effective immediately, the maximum additional amounts that taxpayers age 50+ can contribute to a workplace plan bumps up from $6,500 per year to $7,500 per year.
• Another provision requires all catch-up contributions to be on an after-tax basis for any who earn over $145,000
• Beginning in 2025, individuals between the ages of 60 and 63 will be able to add $10,000 more per year above the standard limit to their workplace retirement plan.

For IRA owners, your catch-up contributions (currently limited to $1,000 extra per year) will be adjusted for inflation in increments of $100 starting in 2024.

New emergency withdrawal exemption

Effective January 1, 2024, a new exemption will enable retirement plan owners (IRA or 401(k) plan) to withdraw up to $1000 annually, without tax penalty, “for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” Note that after this provision goes into effect, those borrowed funds MUST be replenished within three years to avoid future penalties if you make another emergency withdrawal for the same reasons as stated here.

Until then (throughout 2023), you will still pay a 10% tax if you withdraw funds from your retirement account before you are 59 ½ years old.

Of note: Employers can now create emergency savings accounts within their retirement plan.

Automatic enrollment in employers’ 401(k) or 403(b) plans

Does your employer now offer a 401(k) or 403(b) retirement savings plan? If so, effective January 1, 2025, you will be automatically enrolled in a new 401(k) or 403(b) once you become eligible (existing plans are grandfathered). Unless you opt out of participating, your employer will deduct money from each paycheck automatically, and transfer it into the 401(k) or 403(b). SECURE 2.0 specifies that the initial contribution must be between 3% and 10% of your pretax earnings. The contributions will escalate by 1% per year of service to a minimum of 10% and a maximum of 15%. An employee can opt out of the escalation (as well as the auto-enrollment).

Part-time employees must be auto enrolled in their employer’s 401(k) after two years, instead of the current three-year wait.

Exempt from this mandate are small businesses with 10 or fewer employees and newer businesses that started less than three years ago.

Roth account contributions by employers

Effective now, participants in qualified plans can designate that their employer’s matching or non-elective contributions be directed to a Roth workplace account. The amount of the contribution will be added to the employee’s gross income, but it won’t be subject to FICA employment taxes.

In 2024, catch-up contributions for employees earning more than $145, 000 in the previous year must go into a Roth 401(k). That means that anyone who earns more than this amount this year will be subject to the new Roth requirement next year.

Discuss this with your plan administrator to get the most updated information as these provisions roll out.

Higher startup credit for small businesses

The small-business startup tax credit for companies with up to 50 employees goes from 50% of administrative costs to 100%, up to $5,000. This went into effect this month (January 1, 2023).

In addition, a new startup credit allows plan sponsors to write off up to $1000 of employer contributions per eligible employee; the percentage of allowable credit decreases over five years to zero. This credit does NOT apply to defined benefit plans.

Student loan considerations

Employers can treat student plan repayments as elective contributions to one’s retirement plan for matching purposes in the company’s 401(k) plan. In other words, the bill supports workers who want to save while also paying down their student loan debt, by allowing them to receive matching contributions to their retirement accounts based on student loan payments.

529 plan rollovers

Taxpayers who have funds left over in a 529 account (which can only be used to cover qualified educational expenses) will be able to roll over up to $35,000 into a Roth IRA account without penalties. This applies to 529 accounts that were opened at least 15 years ago and it goes into effect on January 1, 2024.

There are more retirement plan changes to come or already in place for qualified plan sponsors, small-business owners, and investors who are saving for retirement. Given that self-directed retirement plans adhere to the same legislative requirements and provisions as their counterparts available from employers, banks, and brokerage houses, we are sure our clients who self-direct their retirement investments will have questions about how SECURE 2.0 affects them. As always, we are available to answer your questions about self-directed IRAs.

If you are new to Next Generation or are considering self-direction as a retirement wealth-building strategy, you can email us at NewAccounts@NextGenerationTrust.com or give us a call at 888.857.8058. You may also schedule a complimentary educational session to discuss self-directed IRAs and working with Next Generation as your plan administrator and custodian.