While the economy, stock market fluctuations, interest rate movement, and the like tend to grab the headlines and our attention day after day, there was a significant law passed in the last week of 2022 called The SECURE Act 2.0, which most people missed but it has a huge and direct impact on most savers. The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 builds upon the original legislation passed in 2019. While much of the language relates to employer sponsored plans such as 401(k)s and 403(b)s, there are very important updates related to Individual Retirement Accounts (IRAs).
As with most legislation that comes out of Congress, there is a lot packed in and not all of it is effective immediately. I will first highlight the changes to Required Minimum Distributions (RMDs) from IRAs and then provide an overview of the more significant changes to employer plans and the effective date of the changes.
Required Minimum Distributions (RMDs)
You will probably recall that RMDs previously began at age 70 ½. SECURE 1.0 pushed that back to 72. Effective in 2023, your first RMD is not required until you reach age 73 (technically by April 1 of the year after you turn 73). So, you now have an additional year to continue deferring those taxes. In the year 2033, the Required Minimum Distribution (RMD) age is scheduled to change to age 75. There are enormous details regarding RMD planning opportunities but, that will be for another newsletter. We notify our clients when the individual RMD is set to begin and each year, thereafter, we will ensure the client is apprised of the RMD due from accounts we advise.
SECURE Act Updates effective now
- As with IRAs, RMDs from your 401(k) have been changed to begin at age 73. There are exceptions to the RMD rule within plans so check with your advisor or plan recordkeeper to determine when you are required to take a distribution. Generally, if still employed, you are NOT required to take the RMD from your current employer’s plan, however, there are a few exceptions.
- For Retirement Plan administrators, you may get some relief from the multiple notices you are required to send to ALL eligible plan participants. Certain notices now only need to be sent to those participating in the plan. Check with your Third Party Administrator (TPA) or advisor for further guidance here.
- If you own a small business and have not implemented a 401(k) for your employees, now might be the ideal time to do so! There are start up tax credits available to you for a number of years.
- There are other items that are allowable in plans immediately, and in future years for that matter, but plans are not currently required to adopt these changes. I will not address these changes in this newsletter but, if you are a 401(k) plan decision maker, your advisor or TPA will consult with you on some of these optional changes and assist in determining if it makes sense to adopt them for your plan.
SECURE Act Updates effective in 2024
- I have mentioned RMDs a few times. Starting next year, you WILL NOT BE required to take an RMD from any Roth money you have in your employer retirement plans. This is a change that will make Roth rules in 401(k)/403(b) plans more consistent with Roth IRA rules.
- Speaking of Roth, if your income exceeds $145,000 and you intend to max-out your 401(k) with a catch-up contribution (if over age 50), that catch-up contribution MUST be deferred as a Roth contribution. This means, of course, that it is not deductible to you. What that also means is that your 401(k) plan will need to allow for Roth deferrals if it does not already do so. This provision has had mixed reviews, with many calling for a delay in this legislation. As it stands now, this is still going to take effect in 2024.
- Force-pays from retirement plans are being increased to a limit of $7,000. What does that mean? If you leave an employer and have a balance of less than $7,000 in the Plan, that balance can be “force-paid” out of the Plan and rolled over to an IRA in your name. If under $1,000, it is paid out as a taxable distribution to you. It is important that you act and have your plan balance rolled over to a new employer’s plan or to an IRA.
SECURE Act Updates effective 2025 and later
- Automatic enrollment will be mandatory for most NEW plans that get started in 2025 and beyond. This feature is already becoming more and more common, but again will be mandatory in the future. Auto enrollment means that your employer will “automatically enroll” you in your 401(k) plan at a pre-determined deferral rate unless you make another election.
- The Catch-up limit for those ages 60-63 will increase to $10,000 per year (indexed for inflation).
- Generally, an employer can limit 401(k) eligibility to those that work at least 1,000 hours in a year. While you can keep that requirement, you might be required to cover employees who have been employed for 2 years and have worked at least 500 hours in a year.
- The bill also calls for the creation of a database or program that will make it easier for individuals to track plan balances from prior employers.
This bill contains many more provisions. This newsletter highlights some of the provisions that will impact you the most in the short term. As stated earlier regarding RMDs, for our clients, both 401(k) plans and individuals, we stay abreast of these changes and will make recommendations according to what we deem suitable for you and your business.
As always, we appreciate the opportunity to serve you. Please do not hesitate to reach out to your advisor if you have any questions or would like to talk more about the opportunities that this legislation presents.
Alan McCormick, CFP™