The $1.7 trillion budget bill signed by President Biden on December 23, 2022 includes the SECURE 2.0 Act of 2022, which could affect your retirement planning in a significant way. Laws related to retirement plan distributions and contributions have been revamped to encourage the average American to save more toward retirement.
Let’s look at how the SECURE 2.0 Act may affect your retirement savings planning for 2023 and beyond.
Catch-up contributions are additional retirement contributions that people aged 50 or older can make into their workplace retirement plans over the standard contribution limit.
The SECURE 2.0 Act has increased the catch-up contribution amount from $6,500 to $7,500 in 2023. Starting in 2025, those between the ages of 60 to 63 will be able to contribute an additional $10,000 per year over the standard limit.
While you are allowed to make withdrawals from your retirement accounts at any time, a 10% penalty tax is imposed on retirement plan distributions taken before age 59 ½ if they are not for reasons specifically allowed by the plan.
The SECURE 2.0 Act allows more situations for early withdrawal without penalties, including:
- Having a terminal illness that may result in death within 84 months
- Claiming hardship for those in domestic abuse situations (starting in 2024)
- Paying long-term care premiums (starting in 2026)
A 401(k) plan allows employees to contribute a certain portion of their wages on either a pre-tax (traditional) or after-tax (Roth) basis. Beginning in 2025, the legislation requires employers adopting new plans to automatically enroll employees in their 401(k) plan, starting at a contribution rate of 3%, although employees may choose to opt out.
Another change to encourage 401(k) contributions for those who have not taken retirement planning seriously is allowing part-time employees who have worked at least 500 hours for two consecutive years to make contributions to their company’s 401(k) plan.
Having to make monthly student loan payments can make it extremely difficult for employees to participate in their company retirement plan.
Starting in 2024, employers can contribute to an employee’s retirement account up to the amount the employee pays off student loan debt that year, even if the employee makes no contribution to the plan that year.
Roth 401(k) Plans
If your contributions to your retirement plan are pre-tax, meaning they reduce your taxable income in the year you make them, they will be taxed when you take them out at retirement. A Roth 401(k) plan is a retirement plan that allows employees to contribute after-tax dollars that will not be taxed when withdrawn from the retirement account at 59-½ or later.
In the past, employer match contributions could not be directed to the employee’s Roth 401(k) account. However, the SECURE 2.0 Act has now changed that.
If you are a small business owner, you need to know how the Secure 2.0 Act may affect your retirement savings planning. As of January 1, 2023, employers can create Roth accounts for SIMPLE and SEP retirement plans. This is an opportunity for you to take tax-free retirement plan distributions in the future.
RMD stands for required minimum distribution. This is the minimum retirement plan distribution amount you are required to take out of your retirement account each year once you reach a certain age and as such is a major component of tax and retirement planning.
As of January 1, 2023, the RMD age threshold has increased from 72 to 73, allowing you to leave your retirement funds alone for an additional year. The RMD threshold age is then set to rise to 75 in 2033. With these new age limits going into effect, you may want to contact your accountant and your financial advisor to see how these changes may affect your retirement savings planning.
In addition, starting in 2024, Roth 401(k) plans will no longer require annual RMDs.
A 529 plan is an education savings plan that has many tax benefits.
Beginning in 2024, those with unused funds in their 529 plans will be able to roll up to $35,000 directly into a Roth IRA with no taxes or penalties. With this new provision, parents and grandparents will no longer have to fear overfunding their children’s and grandchildren’s 529 plans.
Knowing how the SECURE 2.0 Act may affect your retirement savings planning can make a huge impact on planning your current investment contributions and future retirement plan distributions. Reach out to your accountant and your financial advisor today to plan for your tomorrow.