Retirement Plan Makeover: See How SECURE Act 2.0 Could Help You

Overview of SECURE Act 2.0

The new law brings changes to the retirement planning landscape, from changing the age for RMDs to introducing emergency savings accounts and allowing employers to match student loan payments with retirement account contributions.

This article is divided into three sections which allow the reader to quickly identify the material most relevant to them. Working-age individuals will be interested in the changes to employer match and 529 plan changes for their (future?) children. Retirees will be interested in the changes regarding RMDs and Roth conversion strategies. Lastly, small business owners should pay attention to changes in eligibility for the retirement plan start-up credit and the introduction of the new Starter 401k.

I. Working Age

A. Employer matching student loans

Younger employees looking to pay back their student loans will be pleased to know that the Secure Act 2.0 allows employers of all sizes to amend their plans and offer employer matches for amounts paid by participants towards their student loan payments. This match must have the same vesting and matching schedules as if they were salary deferrals, giving young workers an extra incentive to save while paying off educational loans.

B. Linked Emergency Savings Account

This account is linked to an existing employer

retirement plan, such as a 401(k) or 403(b), and is aimed at helping individuals save money for unanticipated expenses at any age. Contributions to this account are treated as salary deferrals into their retirement accounts and employers may opt to offer matching funds up to a certain amount. The account allows for a maximum contribution of $2,500 per year (including employer matching). Employers may set lower contribution limits at their own discretion.

Emergency savings accounts are required to hold only principal-protected investments such as cash or interest-bearing assets. Furthermore, there must not be any fees attached to at least the first four distributions annually. Additionally, these distributions are qualified Roth distributions and thus, tax- and penalty-free.

C. 529-to-Roth Conversion

Starting in 2024, 529 plans can be transferred into Roth IRAs. The transfer must go from the beneficiary of the 529 plan to a Roth IRA for the same person. The 529 plan must have been open for at least fifteen years. The contributions and earnings from the last five years are not able to be moved over during this process.

Each year, the amount that can be converted to a Roth IRA is equal to the contribution limit for the current year minus any other contributions. The beneficiary must have earned income in order to do this conversion. For those looking at long-term savings and retirement planning, there's an overall maximum lifetime transfer of $35,000 with these funds - ideal for repurposing education funding if it turns out not needed or as an efficient way of jumpstarting retirement efforts for wealthier households.

III. Retired

A. Pushed Back Age 73 (2023) and Age 75 (2033)

Starting in 2023, the age requirement for taking RMDs (required minimum distributions) has been extended to 73 and further delayed until 75 by 2033. This delay offers substantial benefits to taxpayers, including deferring higher Medicare premiums and tax-efficient Roth conversions.

B. Higher Medicare Part B/D Premiums Deferred

By pushing back the mandatory withdrawals due to RMDs, you have more control over how much money is taken out of your traditional retirement accounts. Additionally, the amount withdrawn affects your Medicare premiums called IRMAA – allowing for greater freedom in financial planning and avoiding frustrating IRMAA costs.

C. Tax-Efficient Roth Conversions

SECURE Act 2.0 provides extra room to do Roth conversions and ultimately reduces RMDs later in life by extending the time between retirement and required minimum distributions.

D. Affected Individuals Already Taking RMDs from Roth 401k Can Stop in 2024

SECURE Act 2.0 eliminates RMDs for plan Roth 401k accounts beginning in 2024, making them much more attractive as part of a retirement planning strategy. Those already taking RMDs from Roth accounts should be able to stop in 2024.

E. Benefits for Surviving Spouses

The Act provides benefits to surviving spouses by allowing them to be treated as the decedent when it comes to inherited IRAs. After RMDs begin, the surviving spouse's beneficiaries will be treated as though they were the original beneficiaries of the account (which would allow any Eligible Designated Beneficiaries to 'stretch' their RMDs over the decedent's life expectancy). This new option lets them calculate RMDs using the more beneficial Uniform Lifetime Table, which is used by account owners, rather than the less advantageous Single Lifetime Table. By taking advantage of this strategy, retirement savers can elongate the amount of time they are able to extend their withdrawal period; this results in much lower required minimum distributions (RMDs) and a smaller tax bill. The biggest gain from this option is often seen by a surviving spouse that inherits a retirement account from someone much younger.

F. Qualified Charitable Distributions (QCDs): No Change to Starting Age

Qualified charitable distributions, or QCDs, (also known as qualified charitable contributions or QCCs) remain unchanged. Individuals aged 70½ and over may make tax-free distributions from their traditional IRA to a charity of their choice up to the annual maximum of $100,000 per year without any income limitations.

G. Missed RMDs

For purposes of assessing the penalty for an RMD shortfall, the statute of limitations is now 3 years. The statute of limitations for assessing the penalty for excess contributions is 6 years unless it was in relation to the acquisition of property for less than its fair market value.

H. RMD Shortfall Penalty

Effective for 2023 and future years, Section 302 of SECURE Act 2.0 reduces the 50% penalty for an RMD shortfall to 25%. If, however, the shortfall is rectified within the “Correction Window,” then the penalty is further reduced to only 10%. The correction window is defined as beginning on the date that tax penalty is imposed (generally January 1st of the year following the year of the missed RMD) and ends upon the earliest of the three dates: when the Notice of Deficiency is mailed to the taxpayer, when assessed by the IRS, or the last day of the second tax year after it was imposed.

IV. Small Business Owners - Retirement Plan Enhancements and Who is Affected

A. Changes to Employer Matches

The Secure Act 2.0, effective for plan years beginning in 2024, will include changes to employer matches. Employers of all sizes have the opportunity to amend their plans to allow employer matches to amounts paid by participants towards their student loan payments, which must have the same vesting and matching schedules as if they were salary deferrals.

B. Changes to Auto-Enrollment

Beginning in 2025, many new 401(k) and 403(b) plans will be required to include auto-enrollment. However, there is a list of exempt employers for this rule, which includes employers less than 3 years old, church plans, governmental plans, SIMPLE plans, and employers with 10 or fewer employees.

C. Changes to Retirement Plan Start-Up Credit

i. Increase in Eligibility for Employers with 50 or Fewer Employees

Effective 2023, for employers with 50 or fewer employees, the retirement plan start-up credit will now be allowed for up to 100% of plan start-up costs (subject to existing overall limits) up from the previous limit of 50%. In addition, such employers will be eligible for an additional credit attributable to employer contributions to DC plans made during the first 4 years.

ii. Eligibility for Employers Joining an Existing Multiple Employer Plan

Retroactive to 2020, employers without an existing retirement plan who join(ed) an existing Multiple Employer Plan (MEP) are eligible for the retirement plan start-up credit.

iii. Additional Credit for Offering Benefits to Military Spouses

Effective next year (2023), employers who offer non-highly-compensated military spouses special plan benefits (e.g., participation within 2 months of hiring or immediate vesting of employer contributions) are eligible for an additional credit of up to $500 for each military spouse, for up to 3 years per spouse.

D. Changes Regarding SIMPLE IRAs

Starting in 2024, employers with SIMPLE IRA plans will be allowed to contribute up to 10% of an employee's salary, up to a maximum of $5,000. For companies with 50-100 employees, the limits on deferral and catch-up contributions can increase if employers match 4% of their salary or give 3% nonelective contributions (normally 3% and 2%, respectively).

E. New SEP IRA Plan for Household Employees

This plan allows employers to set up an IRA account for their household employees (nanny, housekeeper, etc.) and contribute money to it. The plan also includes credits and incentives for employers to encourage them to offer these plans to their employees.

F. New “Starter 401(k)” Plan

The Starter 401k is a new retirement plan option for small business owners that will begin in 2024. It has auto-enrollment, only employee deferrals (no employer match), and limited deferrals to the current IRA contribution limit. Employers are eligible for credits of up to 100% of plan start-up costs.

V. Conclusion

The Secure Act 2.0 offers a number of retirement plan enhancements that benefit working-age, retired, and small-business owner audiences. Working-age employees will be able to benefit from student loan payments through employer matches, auto-enrollment, and more generous employer credits. Retired individuals can benefit from changes to RMDs, which allow them the flexibility to keep their money in the plan longer. Small business owners will be able to take advantage of the new Starter 401(k) plan with auto-enrollment, credits for offering benefits to military spouses, and other changes.

If you're thinking of making any changes, I strongly suggest connecting with a CERTIFIED FINANCIAL PLANNER! *Not-so-subtle plug*