H.R. 2617, also known as the Consolidated Appropriations Act of 2023 passed on December 29, 2022. While the primary purpose of HR 2617 is to fund several departments of the government and provide financial assistance to Ukraine, Division T of the Act amends the SECURE (Setting Every Community Up for Retirement Enhancement Act of 2019) and renames it SECURE 2.0 Act of 2022. The SECURE 2.0 Act makes significant changes which will have a dramatic impact on businesses and Americans saving for retirement and college. Here are many of the changes:
Rollover 529 Plan to Roth IRA
One of the main reasons why parents don’t want to contribute to a 529 plan is the risk of having the money locked in if their child does not attend college or overfunding a 529 plan. Previously, non-qualified withdrawals were subject to tax on the earnings and a 10 percent penalty. The SECURE 2.0 Act now allows parents to rollover excess 529 plan funds into a Roth IRA for the 529 plan beneficiary once the account has been open for 15 years.
The rollovers count towards the 529 plan beneficiary’s annual Roth IRA contributions ($6,500 for 2023), but are not subject to income limitations. There is a maximum lifetime limit of $35,000 for each beneficiary. Therefore a child can graduate college with excess 529 plan funds, have a high paying job, and still be allowed to make annual Roth IRA contributions using the remaining 529 plan funds for a lifetime limit of $35,000.
Increased age for RMD
The age to start taking Required Minimum Distributions (RMD) from IRAs has increased from 72 to 73 in 2023 and to age 75 beginning in 2033.
Previously, the penalty for not taking an RMD was a steep 50%. The penalty is now 25% and can be as low as 10% if the taxpayer corrects the issue in a timely manner.
No more RMDs on Roth 401k plans
Prior to the new law, Roth 401k plans were still subject to RMDs whereas Roth IRAs were exempt from RMDs. Effective 2024, Roth 401k plans will no longer be subject to RMDs. As a result, Roth 401ks and Roth IRAs will now have the same rules for distributions.
Higher Catch-Up Contributions
Catch-up contributions for taxpayers age 50 and over on IRAs and workplace retirement plans will increase for individuals starting in 2023 and increase further in 2025.
The current IRA catch-up contribution for individuals age 50 and over is $1,000 bringing the total contribution to $7,500 ($6,500 + $1,000). Beginning in 2024, IRA catch-up contributions for individuals age 50 and over will be indexed for inflation.
The maximum amount a person can contribute to a workplace retirement plan (i.e. 401k, 403b, 457b, or Thrift Savings Plan) in 2023 is $22,500 plus $7,500 for any catch-up contributions. Starting in 2025, taxpayers ages 60 to 63 will be able to make catch-up contributions of $10,000 per year to their workplace retirement plans. That amount will be indexed for inflation.
Currently, individuals can allocate their catch up contributions between pre-tax and post-tax. Beginning in 2024, individuals who earn more than $145,000 per year (indexed for inflation) can only allocate their catch-up contributions as post-tax (Roth), meaning they will not get a tax deduction. Taxpayers who earn less than $145,000 can still choose to allocate their catch up contributions as either pre-tax or post-tax.
Employer Roth Matching Contributions
Prior to the SECURE 2.0 Act, employer matching and profit sharing contributions were made as pre-tax contributions, even if the employee chose to have 100% of their 401k contribution allocated to Roth 401k. Starting in 2023, employees can choose to have their employer contributions deposited into their Roth 401k accounts.
Student Loan 401k Matching Contributions
Starting in 2024, employers may include the employee’s student loan payment when calculating employer matching contributions. For example, if an employee makes $2,000 payments towards student loans and $2,000 towards their employer sponsored 401k plan, the employer can apply the matching contributions towards the entire $4,000, not just the $2,000 that the employee contributed to their 401k plan.
Emergency Savings Accounts
The SECURE 2.0 Act creates a new type of account called the emergency savings account which is linked to an employer retirement plan. Starting in 2024, employers may offer emergency savings accounts to their non-highly compensated employees as part of their benefits offerings. Similar to a Roth 401k plan, employees can make after-tax contributions of up to $2,500 per year to these emergency savings accounts. Employer contributions must be at the same rate as deferrals made to other retirement accounts on behalf of the employee..
Employers can automatically opt-in employees into these emergency savings accounts of up to 3 percent of their compensation, but employees can elect to opt-out.
Employees can use these accounts for emergencies so that they do not have to tap into their 401k plans through loans or hardship distributions. Employees can take monthly penalty-free withdrawals for any reason. The account balance can never go above $2,500.
401k Auto Enrollment and Escalation
Currently, employers can choose if they want to automatically enroll employees in their employer sponsored 401k plans and apply automatic escalation. The SECURE 2.0 Act changes the auto enrollment and escalation rules for new 401k plans, but grandfathers in existing plans.
Starting in 2025, new 401k plans are required to automatically enroll employees in their workplace 401k plans at a rate of at least 3 percent, but no more than 10 percent. In addition, employers must also include an auto-escalation of at least 1 percent. Employees are allowed to opt-out and withdraw funds penalty free within the first 90 days.
Exemptions apply to companies with less than 10 employees and new businesses under 3 years old.
In addition, starting in 2025, part-time employees may qualify to participate in their workplace retirement plans after working at least 500 hours for two consecutive years; the current law requires part-time employees to work at least 500 hours for 3 consecutive years.
Revised Qualified Charitable Distributions (QCD)
Taxpayers are currently allowed to donate up to $100,000 per year of their Required Minimum Distributions to a qualified charity to exclude the RMD from their income. Starting in 2024, the Qualified Charitable Distribution limit will be indexed for inflation.
Roth SEP and SIMPLE IRAs
Starting in 2023, SIMPLE and SEP IRAs will now be able to accept after-tax (Roth) contributions.
Penalty Free Withdrawals
The current tax law imposes a 10 percent penalty on distributions from workplace retirement accounts before the age of 59.5. The SECURE 2.0 Act expands the exceptions to allow distributions that would not be subject to the 10 percent penalty.
Saver’s Match
Starting in 2027, low income taxpayers who contribute to a retirement plan may be eligible for a government matching program of up to $2,000 per year. Eligible retirement plans include workplace plans such as 401k, 457b, 403b and IRAs. Roth IRA contributions are not eligible for the savers match.
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