Understanding the New Laws to SECURE Your Retirement

At the end of the year, Congress usually passes a massive budget bill with items in it that most people are unaware of. On December 29, 2022, the Consolidated Appropriations Act was signed into law, and inside of it was a package known as SECURE Act 2.0, which was a follow up to the 2019 SECURE Act (Setting Every Community Up for Retirement Enhancement) that made several important improvements to retirement saving. Even when the act passed in 2019, it was understood that more needed to be done, and the second iteration of it has taken retirement saving improvements a step further to make it easier for people to save for retirement and maintain those savings. In this issue of the newsletter, we will break down several of the new laws that were passed, some of which are in effect now, with others to be enacted in later years.

Changes to Retirement Plan Contributions
To build savings in retirement plans, you have to get money into those plans at a rate that will allow those funds to build over time. Because of the tax advantages of those plans, there are restrictions on what you can contribute and when. The SECURE Act 2.0 has made several changes that can increase opportunities to build your savings base. Here are some of those items:

1. Auto-Enrollment and Contribution Escalation – For employers who offer defined-contribution retirement plans, like 401k plans, it would be required rather than optional to enroll eligible new employees automatically at a contribution rate of 3% with an annual contribution escalation of 1% per year until the rate hits 15%. Employees would still be able to opt out of enrollment or the change the contribution rate. This provision starts in 2025.
2. Long-Term Part-Time Employee Enrollment Eligibility – Employees who work at least 500 hours in 2 rather than 3 consecutive years will be eligible to participate in an employer retirement plan. This provision starts in 2025.
3. Indexing IRA Catch-up Contributions Annually – Currently, the IRA catch-up contribution, which allows individuals age 50 and over to increase their annual contributions, is capped at $1,000 per year. The 2023 annual limit for savers under age 50 is $6,500. Starting in 2024, the annual catch-up allowance will be indexed for inflation.
4. Adding a Second Tier of Catch-up Contributions to Employer Plans – This second tier of catch-up contributions applies to individuals age 60 to 63, allowing a higher savings level than those between ages 50 and 59. For 401k and 403b plans the catch-up contribution increases from $7,500 to the greater of $10,000 or 150% of the age 50 catch-up (would be $11,250 in 2023), above the annual base limit of $22,500. In these employer plans, employees whose compensation exceeds $145,000 would have to make catch-up contributions after-tax to the Roth portion of their plan. For SIMPLE employer plans, the catch-up amount would increase from $3,000 to the greater of $5,000 or 150% of the age 50 catch-up, above the annual base limit of $15,500. This provision goes into effect in 2025.
5. Allowing Designated Roth Employer Contributions in Employer Plans – Prior to SECURE Act 2.0, any employer contribution to an employer retirement plan was a Traditional contribution and would be fully taxable upon distribution. This new provision, which is effective immediately, allows employees to elect to have employer contributions made as designated Roth contributions, meaning at distribution, those funds would come out tax-free if all other requirements are met. Of course, there is no free lunch, so these contributions would be considered compensation to the employee and would be reportable income in that year.

Changes to Retirement Plan Distributions
Very often when discussing retirement planning, the emphasis is placed on building your nest egg in anticipation of retirement. However, once you are in retirement, it is also important how you manage that nest egg to make it sustainable over what may be a lengthy retirement period, or how you can preserve its value for yourself or to pass on to your loved ones. Here are a few items from SECURE Act 2.0 that serve to strengthen your ability to maintain your retirement account value:

1. Increase to the RMD Age – After the original SECURE Act raised the age at which distributions are mandated to be taken from pre-tax retirement plan assets from 70-1/2 to 72, this version increases the age at which Required Minimum Distributions (RMDs) must begin to 73 starting in 2023 and starting in 2033 will raise it to 75.
2. No RMDs Required for Roth Employer Accounts – Currently, all employer plan money is subject to RMDs. Beginning in 2024, employees who have Roth funds in their employer plan will not have to take RMDs on those funds.
3. Lowering the RMD Excise Tax – Currently, individuals who are subject to RMDs but fail to withdraw the funds as required in the given year are subject to a 50% Excise Tax on amounts that should have been withdrawn that were not. That Excise Tax will decrease to 25%, but if the individual completes the distribution within 2 years of when it was required, that amount will reduce to 10%.

New Provisions
In the new legislation, several brand new items were included that take into account some of the challenges faced by retirement savers as well as what amounts to a rollover option for people who have juggled retirement saving and college funding. These new provisions can serve to lessen burdens people may face in the present, while improving their chances for retirement success later.

1. Student Loan Payments Counted to Allow Employer Plan Matching – Recognizing the challenge many Americans have with paying down student loan debt, hampering their ability to save in a retirement plan, the act will allow employers to make matching contributions to a plan participant’s account based on the amount of qualifying student loan payments they are making. This goes into effect in 2024.
2. Creating an Emergency Savings Account within an Employer Plan – Starting in 2024, employers will be able to create a separate account within an employee’s retirement plan that is able to be used for emergencies. Employees can contribute to this account up to 3% of compensation, and contributions cannot exceed $2,500 (indexed for inflation).
3. Allowance of Emergency Withdrawals from Retirement Accounts – Withdrawals of up to $1,000 per year (with limited ability to repeat withdrawals) from employer plans and IRAs for certain emergencies (more liberal than the current Hardship Withdrawal requirements) would not be subject to the 10% early withdrawal tax penalty.
4. Rollover of 529 Plan Balances to Roth IRA – For people who have saved for a student’s education in a 529 Plan but haven’t had to use the full amount for educational expenses, if their account was opened 15 years prior, up to $35,000 of those funds can be rolled over to a Roth IRA for the account owner beginning in 2024.

Stewardship Emphasis
With so many things that you cannot control, including the messages that are placed in front of you, turn down the noise around you, and take control of what you can control.

The Empowerment Channel |Volume CCVIII | Dedicated to Promoting Financial Education through Stewardship