SECURE Act 2.0: What You Need to Know
If you have been scanning the news and have come across the SECURE Act, wondering what it means you are not alone. Whether you run a business with employees, or have retirement accounts of your own, this act affects you positively. To see where you can take advantage of the changes, we’ve got the basics of these provisions outlined in detail below.
What The SECURE Act Is, In a Nutshell
President Biden signed into law a $1.7 trillion government spending bill on December 29, 2022. The bill includes some tax provisions, mostly centered around retirement plans. The “SECURE Act 2.0,” builds on previous legislation that, among other things, modified the starting age for minimum distributions from retirement accounts and also adds some additional tax benefits for companies offering retirement savings options for their employees.
Modification of Credit for Small Employer Pension Plan Start-up Costs
Depending on the size of your company, you have more tax credits available to you. You can now apply all of your start up costs if you are in that 50 and under range.
Old law: Employers with up to 100 employees were eligible for a credit for start-up costs related to establishing an employer retirement plan (401(k), SIMPLE IRA, or SEP). The credit was equal to 50% of start-up costs up to:
- The greater of $500; or
- The lesser of:
- $250 multiplied by the number of non-highly compensated employees or
The credit is available for the first three years of the plan’s existence.
- 100% of start-up costs are now eligible for employers with up to 50 employees. Employers with 51–100 employees will still be eligible for 50% of the plan costs.
- The annual cap under the old law still applies.
- A new credit is added based on employer contributions made to the plan for the first five tax years of the plan. The credit is equal to the applicable percentage of the employer contributions made on behalf of employees ($1,000 per employee cap).
- The applicable percentages are:
New Law: The credit is enhanced as follows:
Optional Treatment of Employer Matching or Nonelective Contributions as Roth Contributions
If you have a 401 (k), 403(b), or a 457(b) retirement plan, you will now be able to apply some or all of the employer-contributed amounts as post tax (Roth) contributions.
Old law: Employers making matching or nonelective contributions to employees under a 401(k), 403(b), or 457(b) plan, were required to make these contributions on a pre-tax basis even if the employee deferrals were made as designated Roth contributions (post-tax contributions).
New law: Effective as of the date of enactment of the Act, employees participating in a 401(k), 403(b), or 457(b) plan will now be eligible to designate some or all of employer matching or nonelective contributions as Roth (post tax) contributions.
SIMPLE and SEP Roth IRAs
If you have a SIMPLE IRA or SEP retirement plan, you will now be able to apply some or all of the employer-contributed amounts as post tax (Roth) contributions.
Old law: Only 401(k), 403(b), or 457(b) plans allowed employees to make designated Roth (after-tax) contributions to the plan. SIMPLE IRA plans and SEP plans did not allow designated Roth contributions.
Starter 401(k) Plans for Employers with No Retirement Plan
New law: Effective for tax years beginning after December 31, 2022, employees participating in either a SIMPLE IRA plan or a SEP plan will be eligible to designate some or all of their contributions as Roth (after tax) contributions.
Effective for plan years beginning after December 31, 2023, the SECURE Act creates a new type of 401(k) plan referred to as a “starter 401(k).” This type of plan allows certain employers to provide a deferral-only option to employees. The employee is treated as having the employer making a contribution equal to a percentage of compensation (minimum of 3% but no more than 15%, applied uniformly). The maximum amount an employee can contribute is $6,000 per year (indexed for inflation). Employers are not permitted to make matching or elective contributions. An employer is eligible to offer a starter 401(k) deferral-only arrangement if neither the employer nor a predecessor employer maintains another qualified plan for the year in which the determination is being made.
Increased required minimum distribution (RMD) starting age
At 72, you are required to start taking out a portion of your tax deferred retirement accounts. The SECURE Act raises the age requirement a tad; from 72 to 73 in 2023, and again to 75 in January of 2033. Your birthday may fall in a zone that could affect this timing a bit, so make sure you dive into the details to see what applies to you.
Old law: Upon reaching the age of 72, individuals with balances in tax-deferred retirement plans (401(k), traditional IRAs, etc.) are required to begin withdrawing a minimum amount from these accounts each year.
- Age 73 beginning January 1, 2023 (for individuals who attain age 72 after December 31, 2022 and age 72 before January 1, 2033).
- Age 75 beginning January 1, 2033 (for individuals who attain age 74 after December 31, 2032).
New law: The starting age increases from age 72 to:
Higher Catch-up Limit to Apply at Age 60, 61, 62, and 63
Once you reach the ages of 60, 61, 62, and 63, you can contribute 50% more catch up funds to get that account up. The limits and dates are a bit different for SIMPLE plans, and there are some finite details if you make more than $145,000 per year.
Old law: Defined contribution retirement plans under 401(k), 403(b), or 457(b) are permitted to allow participants who are age 50 or older to make additional “catch-up” contributions to their account. Catch-up contributions are elective deferrals that are not subject to the annual elective deferral dollar limit ($22,500 for 2023). The annual dollar limit on catch-up contributions is $7,500 for 2023. The annual dollar limit on catch-up contributions to SIMPLE plans is $3,500 for 2023.
New law: Beginning in 2025, the annual catch-up contribution limit will increase to the greater of $10,000 ($5,000 for SIMPLE plans) or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans) for individuals who attain ages 60, 61, 62 and 63. The dollar limits are indexed for inflation beginning in 2026. Individuals with income greater than $145,000 in the preceding year must make these catch-up contributions on a post-tax basis.
Tax-free Rollovers from 529 Accounts to Roth IRAs Permitted
If you have an older college fund that would become a better asset to you in a ROTH IRA, here is your opportunity to roll it over to one, sans tax or penalties.
Effective for distributions made after December 31, 2023, the law now permits beneficiaries of 529 college savings accounts to make direct rollovers from a 529 account in their name to their Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete.
The 529 account must have been open for more than 15 years. The rollover can’t exceed the aggregate amount contributed to the account more than five years before the rollover. Total rollovers can’t exceed $35,000 over the beneficiary’s lifetime. Rollovers are subject to the Roth IRA annual contribution limits ($7,500 in 2023).
In Conclusion, These Are The Changes Being Made:
- More Startup Tax Credit for Employers: Enhances start-up credit for employers of up to 50 employees by allowing 100% of the cost of establishing employee retirement plans to be credited on their tax return. Those with 51–100, can still benefit from 50% of the costs.
- Apply Employer-Contributions To Post-Tax/Roth For 401(K), 403 (B), 457(B): Employees participating in a 401(k), 403(b), or 457(b) plan will now be eligible to designate some or all of employer matching or nonelective contributions as Roth (post tax) contributions.
- Apply Employer Contributions To Post-Tax Roth For Simple IRA Or SEP Plans: Employees participating in either a SIMPLE IRA plan or a SEP plan will be eligible to designate some or all of their contributions as Roth (after tax) contributions.
- Starter 401(k) Plans for Employers with No Retirement Plan: This type of plan allows certain employers to provide a deferral-only option to employees, effective after December 31, 2023.
- Increased Age for Minimum Distributions: Increased required minimum distribution (RMD) starting age increased to 72 for 2023, and will go to 75 in 2033.
- Higher Catch Up Fund Limits: Beginning in 2025, there will be a higher Catch-up Limit to Apply at Age 60, 61, 62, and 63, and are indexed for inflation beginning in 2026.
- Rollovers from 529 into ROTH IRA Are Tax Free: For distributions made after December 31, 2023, the law now permits beneficiaries of 529 college savings accounts to make direct rollovers from a 529 account in their name to their Roth IRA without tax or penalty.
Here is your bottom line, or the high level items affected by the SECURE Act’s signing.
Hopefully our outlining of these changes give you a clearer sense of the SECURE Act and how they may apply to you and/or your business. If you are still in the dark, we can help translate this new law into decisions to support your best tax outcome. Our dedicated tax team is on top of the latest laws, like the SECURE Act, and can help steer you and your business in the right direction. Don’t hesitate to reach out to us to make sure the Secure Act is working for you.