The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was passed by Congress in late 2022. It is designed to encourage Americans to improve their retirement savings plans. Of the many impacts this bill has, here are some of the more important changes that may affect your retirement plans. I actually really like a lot of the changes.
Automatic Enrollment
Automatic enrollment will be a requirement for new 401(k) and 403(b) plans. This means newly hired employees will have their retirement accounts automatically set up when they are hired/eligible. The automatic enrollment will be for a minimum employee contribution of 3% the first year and increase 1% each year until it reaches at least 10%. You can still opt out of contributions if you would like.
Small Employer Tax Credit
This is probably the coolest and most mind blowing change. Businesses with 50 or fewer employees may receive a tax credit of a percentage of the amount contributed by the employer on behalf of the employees, up to a per employee cap of $1000. The applicable percentages are as follows: 100% in the first and second years, 75% the third year, 50% the fourth, and 25% the fifth. This gives strong incentive to small businesses to establish retirement plans for their employees. This is applicable for Simple IRA’s as well as 401k’s and SEP’s. So here is a basic example. You own a small business, and have 20 employees. You start up a Simple IRA, and you contribute $1000 to each of their retirement accounts throughout the year. You would receive $20,000 as a business tax credit that first year, which would continue at the given percentages for 5 years.
RMD Age Increase
Prior to the Secure Act 2.0, people were required to begin taking out their required minimum distributions from their pre-tax retirement accounts beginning at age 72. But starting in 2023, the RMD age is increased to 73, and will increase to 75 beginning January 2033.
529 to Roth
The beneficiary of a 529 education account may now rollover the funds to a Roth IRA account (in their name) with no tax penalties. The 529 account must be at least 15 years old and there is a $35,000 lifetime rollover limit. The Roth account is still subject to the yearly contribution limits ($6,500 for 2023). These changes are great for those who are beneficiaries of 529 accounts, but choose not to attend college, or just simply do not have education expenses to pay. They can now roll over those funds to a separate Roth retirement account without penalty.
Roth SIMPLE Retirement Plans
Before 2023, SIMPLE IRA plans only allowed pre-tax contributions. The Secure Act 2.0 now allows SIMPLE IRAs to accept Roth contributions from the employer and employee if they choose. This was a huge limitation to Simple IRA’s, that no longer exists. Roth Simple IRA’s are still being rolled out and are not immediately available, but will be in the coming months.
There are several other small changes in the Secure Act 2.0, and changes that are not scheduled to happen for several years. The topics above are the most applicable changes. If you have any questions about how any of these changes might affect you, please reach out to me.
By Jimmy Hancock