Just before funding for the federal government was set to expire on December 23, 2022, Congress passed—and President Biden later signed—the Consolidated Appropriations Act of 2023. The nearly $1.7 trillion appropriations bill funds the federal government through September 30, 2023.
There were numerous items included in the Act related to retirement savings and distributions. Collectively these items have been labeled “Secure 2.0” as they are a follow up to the SECURE (Setting Every Community Up for Retirement Enhancement) Act passed in 2019.
One of the most noteworthy aspects of the original Secure Act was raising the age for RMDs (required minimum distributions) from 70.5 to 72. That age has now been pushed further to age 73 for those born between 1951 and 1959 and age 75 for those born in 1960 or later. The penalty for not meeting the RMD has been reduced from an onerous 50% to 25% (and only 10% if corrected in a timely manner).
There are also several items in Secure 2.0 designed to increase retirement savings. IRA catch-up contributions limit (age 50+) will increase with inflation (in $100 increments) beginning in 2024. Catch-up contributions for those age 60-63 will increase to at least $11,250 starting in 2025.
There are new items for 401ks including increased credit for 401k costs for small businesses (up to 50 employees), required auto enrollment for 401k plans (with the ability for employees to opt out), allowing student loan payments to count toward a 401k employer match even if the employee can’t afford to contribute on their own, expanding access to an employer retirement plan for part-time employees, and the ability to withdraw up to $1,000 from your 401k account for emergency purposes penalty free (ordinary income tax will still apply unless paid back within 3 years).
Changes are also coming to Roth accounts. Beginning in 2024 RMDs for Roth 401k accounts are eliminated (just like an individual Roth IRA), Roth options for SEP and SIMPLE IRAs are now an option. Employer match contributions can be done to a Roth 401k. And, with several restrictions (including a 15-year existence rule & IRA contribution rules), 529 plans can be transferred to a Roth IRA of the 529 beneficiary.
An additional item of note for those earning over $145,000 will be the requirement that beginning in 2024 catch-up 401k contributions (50+) must go to a Roth 401k account and therefore will not provide a current year tax deduction, but instead will be tax free upon withdrawal.
There are numerous additional targeted items including:
-Employers can offer workers the option to setup an emergency savings account ($2,500 max) via payroll deductions.
-QLAC (qualified longevity annuity contract) limit has been increased to $200,000 (up from $135,000 or 25% whichever is less) as part of retirement account.
-For low-income earners the savers credit has become a limited federal matching contribution.
-There are also tax credits for small businesses that allow military spouses to immediately enroll in the employer retirement plan and immediate vest any employer matches.
-Penalty-free withdrawals of up to $10,000 or 50% of account value, whichever is less, from a retirement plan in the case of domestic abuse.
-A new exception to the 10% penalty for early distribution from a qualified plan for individuals with a terminal illness.
-A one-time election for a QCD (qualified charitable contribution) to a split-interest entity such as a CRT (Charitable Remainder Trust) with a maximum of $50,000.
-A modification of the RMD rules for special needs trusts directly related to Medicaid repayment provisions under state law.
There are many changes that impact saving to and withdrawing from a retirement plan account each with its own nuance and implementation timeframe. One key advantage of an on-going relationship with a financial planner who puts your interests first is having your financial plan updated as tax laws change to be as efficient as possible in fulfilling your goals.
