As part of the 2023 Consolidated Appropriations Act, the SECURE Act 2.0 of 2022 was signed into law during the last few weeks of 2022. The act offers a great deal of incentives and enhancements meant to help Americans save for retirement.
How the SECURE Act 2.0 of 2022 Impacts Retirement Planning in 2023 and Beyond
1. Extension of age to take RMDs
Until this year, the age to take required minimum distributions (RMDs) was 72. Failure to begin taking RMDs from qualified retirement plans and IRAs by that age results in a 50 percent excise tax on the amount of the RMD.
- Beginning on January 1, 2023, the age to take RMDs is moved up to 73. So, if you turn 72 in 2023 or later, you’ll begin your RMDs when you turn 73. By 2033 it will be moved up to age 75, and
- The penalty for not taking RMDs from qualified retirement plans and IRAs on time decreases from 50 percent to 25 percent. However, the penalty for missed RMDs from IRAs that are discovered and corrected on time is reduced to 10 percent.
2. Change for required minimum distribution rules for Roth 401(k)s
Currently, original owners of Roth IRAs don’t have RMD requirements during their lifetime, but owners of 401(k)s do.
- Beginning in 2024, the distribution requirement is eliminated for Roth 401(k) and solo 401(k) owners.
3. Increase in employee contributions and employer non-elective contributions for SIMPLE IRAs
In 2022, the limit for an employee’s elective deferral contribution is $14,000 with a catch-up contribution for ages 50 and over of $3,000.
- Beginning in 2024, sections 116 and 117 of the SECURE 2.0 Act provide a 10 percent increase in the annual deferral limit and the catch-up contribution for employers who have no more than 25 employees. Employers with 26 to 100 employees will have the ability to offer higher deferral limits provided that the employer gives a 4 percent matching contribution or a 3 percent employer contribution.
Additionally for 2022, employer contributions to an employee’s SIMPLE IRA are limited to either a non-elective contribution of up to 2 percent of the employee’s compensation or a dollar-to-dollar matching contribution of up to 3 percent of the employee’s compensation.
- Beginning in 2024, employers can make additional contributions to each employee of the plan if the contributions do not exceed the lesser of up to 10 percent of employee compensation or $5,000. These contributions will be indexed for inflation.
4. Increase in catch-up contributions for IRAs and 401(k)s
Individuals who own traditional and Roth IRAs can currently make a catch-up contribution of $1,000. However, this amount is not indexed for inflation.
- Beginning in 2024, while that contribution limit initially remains at $1,000, it will be indexed to inflation—meaning it could increase during times of high inflation.
Employees aged 50 and older who have workplace plans like 401(k)s and solo 401(k)s can make catch-up contributions of up to $7,500 in 2023 and beyond.
- The SECURE Act 2.0 provides greater catch-up contributions beginning in 2025 for employees ages 60-63—to the tune of up to $10,000 (indexed to inflation).
- Additionally, after 2023, catch-up contributions are required to receive Roth (after tax) treatment if made by employees who earn more than $145,000. If you make $145,000 or less (adjusted for inflation) you’re exempt from this requirement.
5. Extension for contributions to solo 401(k)s for sole proprietors and single-member LLCs
Currently these business entities must make salary deferrals by December 31 of the tax reporting year—meaning the plan had to be established by that date. (Employer matches can be made up until the day the tax return is filed).
- Under the SECURE Act 2.0 that timeframe is extended for sole proprietors and single-member LLCs that establish solo 401(k)s after the end of the taxable year. They now have until the date of the owner’s tax return to make employee salary deferrals and employer matches to their plans.
6. Provision for unused college savings to be rolled over into a Roth IRA
- This exciting enhancement provides tax-free (and penalty-free) rollovers from 529 college savings plans into Roth IRAs. To qualify, you must have owned the 529 for 15 years. You’ll also have to follow Roth contribution limits, and not exceed a lifetime cap of $35,000.
7. Creation of Roth SIMPLE IRAs and Roth SEP IRAs
Currently SIMPLE IRAs do not have a Roth contribution provision. SEP IRAs can only accept non-Roth employer contributions.
- Starting with the 2023 tax year, Section 601 of the SECURE Act 2.0 allows you to make Roth contributions to your SIMPLE IRA, and SEP IRAs will allow both employer and employee Roth contributions. It’s important to note that there are complexities involving this provision that we urge you to discuss with your financial advisor and/or CPA, although we do anticipate further guidance from the IRS later this year.
Final Words from Advanta IRA
As a leading self-directed IRA service provider, Advanta IRA does not give investment, financial, or tax advice. What we do is arm you with the knowledge to make informed decisions relevant to your retirement planning.
The SECURE Act 2.0 presents provisions and benefits not mentioned above. Some are easy to understand, others a bit more complex. We urge you to consult with your financial advisor or CPA to determine exactly how this bill impacts you when it’s signed into law. With understanding and proper guidance, you can ensure to make the most of the benefits in the provisions that pertain to you.
YouTube Video: Facts about The SECURE Act 2.0 of 2022