SECURE Act 2.0 Impact on Clients’ 2023 Retirement Planning

The long-anticipated successor to the 2019 SECURE Act, dubbed “SECURE Act 2.0”, was included in this year’s massive year-end government spending bill. The law itself was focused on expanding retirement savings options and providing incentives for taxpayers to take advantage of traditional retirement savings vehicles. While some SECURE Act 2.0 provisions build off elements contained in the original law, others are entirely new and may require employers to take action to implement. As we move forward into the new year and beyond, advisors, small businesses and individual clients should take stock of the new opportunities that may increase and incentivize retirement savings going forward.

Changes to Retirement Contribution & Distribution Rules

The original SECURE Act increased the required beginning date (RBD), or the age at which taxpayers must begin taking distributions from traditional retirement accounts, from age 70.5 to age 72. The successor SECURE Act 2.0 Act will gradually increase the age at which required minimum distributions (RMDs) from traditional retirement accounts must begin from 72 in 2022 to 73 in 2023 and up to age 75 by 2033.

The law also increases the “catch-up contribution” limits from $7,500 in 2023 to $10,000 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024 ($5,000 for SIMPLE plans). The law also provides that the $1,000 catch-up contribution to IRAs will be adjusted annually for inflation beginning in tax years after 2023. All catch-up contributions will be indexed for inflation after the 2025 tax year.

Starting in tax years beginning after 2023, however, all catch-up contributions will be treated as Roth contributions. That means they are contributed with after-tax dollars, so they don’t reduce current taxable income, but can be withdrawn tax-free in the future.

The law also makes significant changes to the current saver’s credit, which provides a nonrefundable tax credit for certain lower-income taxpayers who make contributions to their retirement plans. The existing saver’s credit will be replaced by a 50% matching contribution from the federal government (the match will be deposited into existing 401(k)s and IRAs). That matching contribution will be limited to $2,000 and will also be subject to phase out based on income levels.

Additional Changes to Retirement Tax Benefits

The SECURE Act 2.0 recognizes that there are various reasons why taxpayers fail to take advantage of tax-preferred retirement savings accounts. Going forward, it will allow employers to offer small incentives (such as gift cards) to encourage employees to contribute to these plans. The incentives cannot be bought with plan assets and must be limited to de minimis amounts.

Beginning in 2024, the SECURE Act 2.0 will also allow employees to take emergency distributions from their retirement savings accounts without penalty (currently, a 10% penalty plus ordinary income tax applies if an early distribution does not qualify for an exception). These emergency distributions will be limited to $1,000 each year. Also, taxpayers who take emergency distributions must repay the distribution within a three-year period or will be prohibited from taking another $1,000 distribution during the following three-year period. Non-highly compensated employees may be entitled to contribute the lesser of (1) 3% of compensation or (2) $2,500 to emergency savings accounts using after-tax dollars.

Starting in 2024, employers will also be entitled to make matching contributions to the retirement accounts of employees who are paying off student loan debt.

The SECURE Act 2.0 also addresses the “missing plan participant” issue by creating a database that can be searched to help people locate their retirement plan contributions that they may have lost track of over the years. The Department of Labor will be in charge of the database, which should be up and running within two years of the date the law was enacted.

Under current law, certain long-term part-time employees must be eligible to participate in retirement plans if they have at least 1,000 hours of service within a 12-month period or 500 hours of service over a three-year period. For tax years beginning after 2024, the SECURE Act 2.0 reduces that three-year period to two years.

Conclusion

The SECURE Act 2.0 can significantly impact retirement plan participants’ savings strategies and options going forward. Clients and advisors should pay close attention to IRS guidance interpreting the various provisions of the law as we move forward into 2023.

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