How the New Rules Will Affect Your 401(K) or IRA
Included in the $1.7 trillion omnibus spending bill signed by President Joe Biden last December is the Secure 2.0 Act of 2022. While the Act includes over 90 provisions, the primary focuses are:
• Expanded access to retirement plans,
• Raising the age for Required Minimum Distributions (RMD)
• Limiting costs to withdraw funds,
• Increasing retirement savings, and
• Lost & found database.
Here’s a look at the major provisions of the Act as they relate to the above 5 categories.
Expanded Access to Retirement Plans
Beginning in plan years after December 31, 2024, 401(K) and 403(b) plans will be required to automatically enroll participants at the time they become eligible under the plan provisions. All current 401(K) and 403(b) plans are grandfathered. Note: Employees retain the option to not participate.
Initially the automatic enrollment amount is at minimum 3% and no more than 10%. In subsequent years, the amount increases until it reaches at least 10% but no more than 15%.
Prior to enactment of the Secure 2.0 Act, employers were required to allow part-time workers to participate in the employers’ 401(K) plan once they have attained:
• one year of service with 1,000 hours, or
• three consecutive years of at least 500 hours of service each year.
The new rules reduce the three-year minimum to two years effective January 1, 2025.
Raising the Age for Required Minimum Distributions (RMD)
Under the old rules, participants were generally required to begin taking distributions from their retirement plans at age 72. Effective January 1, 2023, the new RMD rules raise the age to 73 … with a further increase to 75 on January 1, 2033.
One benefit of the change may be enjoyed by plan participants who choose to move retirement plan assets to a Roth IRA. The amount converted be taxable. That said, Roth accounts don’t require RMDs during the owner’s lifetime … plus qualified withdrawals down the road are tax-free. That is in stark contrast to traditional 401(K) and IRA plans.
Limiting Costs to Withdraw Funds
Prior to the change in rules, early distributions from tax-advantaged retirement accounts such as 401(k) plans and IRAs are subject to an additional 10% tax. Under the new provision, employees can withdraw emergency expenses from their accounts for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.”
Those emergencies may include withdrawals for:
• domestic abuse victims
• individuals with terminal illness
• qualified disasters
Plan participants are limited to one distribution of up to $1,000 per year and have the option to repay it within three years. No further emergency distributions are allowed during the three-year repayment period unless repayment has been made.
The emergency withdrawal provisions are effective after December 31, 2023.
Increasing Retirement Savings
Saver’s Match: The new rules provide for eligible low-income earners who make contributions to retirement plans to receive a nonrefundable tax credit paid in cash. The credit is equal to 50% of plan contributions, up to $2,000 per individual to be deposited in the taxpayer’s retirement plan account.
The tax credit is effective for tax years beginning after December 31, 2026, and is scheduled to phase out between $41,000 and $71,000 in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers and married filing separate; $30,750 to $53,250 for head of household filers).
Higher Catch-up Limit for Ages 60-63: Employees who have attained age 50 have been permitted to make catch-up contributions up to $6,500 over and above the basic limits. Now, for tax years beginning after December 31, 2024, the catch-up limit is extended for taxpayers between 60 and 63 years old. The new limits ... the greater of $10,000 or 50 percent more than the regular limit in 2025.
IRA Catch-up Limit Indexed for Inflation: The Act indexes the contribution limit for years after 2023.
Retirement Savings Lost & Found
Retirees and plan administrators sometimes lose track of each other’s contact information due to changes in name and/or address. The act mandates the creation of a retirement savings lost-and-found online searchable database to be managed by the Department of Labor. The database is to be established within two years of the date of enactment of the act. The database will allow individuals to search for plans and the contact information of the administrator of any plan in which they are or were a participant or beneficiary.
The above presentation is meant as an overview only.
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