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Secure Act 2.0 Brings Key Changes for Retirement Accounts

By: Financial Hotline
Summer 2023 (Vol. 41, No. 2)

A Required Minimum Distribution (RMD) is the minimum amount of money you must withdraw from a tax-deferred retirement plan after you reach a certain age. In 2022, you had to begin taking RMDs at age 72, the Secure Act 2.0 increases the RMD age 73 in 2023. For people who turn 73 after 2030, and reach 74 before 2033, RMDs start the year you turn 74. And if you turn 74 after 2034, you must start RMDs at age 75.

If you forgot to take your RMD in 2022, you could face a penalty equal to 50% of the amount not taken. That decreased to 25% in 2023. The penalty is reduced to 10% for IRA owners if the account owner corrects the mistake in a timely manner. Roth IRAs don’t have RMD requirements but for some reason, Roth 401(k) plans do. The Secure Act 2.0 corrects this by eliminating mandated RMDs for Roth 401(k)s in 2024.

Catch-up Contributions. In 2023, we can contribute $22,500 to qualified workplace retirement plans like a 401(k) or a 403(b). If you are 50 years old or more, you can contribute an extra $7,500. The Secure Act 2.0 brings a new category for those age 60 to 63. Starting in 2025, they can contribute up to $10,000 more. Starting in 2024, if you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars.

Automatic 401(k) and 403(b) enrollment beginning in 2025. Instead of asking employees to join a retirement plan, they will be automatically enrolled and have to choose to opt out. Existing plans are grandfathered in but new plans will have to automatically enroll participants with a default contribution rate of at least 3% of an employee’s salary, which will increase by one percent annually until it reaches at least 10%. Small businesses with 10 or fewer employees, government plans, church plans and new businesses less than three years old are exempt.

Defined Contribution Plans Emergency Distributions and Emergency Funds (includes 401(k), 403(b) plans, employee stock ownership and profit sharing plans). Plan owners will be able to withdraw up to $1,000 without penalty as an emergency distribution, with the option to repay the distribution within three years. Employers can also set up and automatically enroll an employee in an emergency savings account linked to their retirement accounts (up to $2,500) with an automatic employee contribution of 3% or less.

529 to Roth IRA Conversions. If you don’t use the funds in your 529 plan for college, you can now convert up to $35,000 saved in a 529 plan to a Roth IRA with no penalties. The 520 account must have been open for over 15 years and rollovers are still subject to Roth IRA annual contribution limits.

Employer Match for Student Loan Payments. Employers can consider student loan payments as elective retirement contributions for the purpose of making employees eligible for matching contributions. For example, let’s say you are making $50,000 per year and you are eligible for an employer match of 10% if you contribute $500 to retirement each month. If you are making a student loan payment, you can count that amount towards fulfilling the minimum contribution amount.

Roth Employer Match is now an Option. Previous rules require restricted employer matching contributions to pre- tax accounts only. As of Dec. 29, 2022, participants have the option.

Expanded Cap on Qualified charitable distributions (QCDs). Beginning in 2023, people who are age 70½ and older may elect as part of their QCD limit a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. This amount counts toward the annual RMD, if applicable.

Qualified longevity annuity contracts (QLACs) are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that begin payments on or before age 85. The dollar limitation for premiums increased to $200,000 from $145,000 starting January 1, 2023. The law also eliminates a previous requirement that limited premiums to 25% of an individual’s retirement account balance.