January 5, 2023
Retirement laws and the impact they could have on taxpayers came into focus in late-December when President Joe Biden signed into law the Secure 2.0 Act, a new law that makes sweeping changes to retirement plans and associated distributions.
The legislation, which took effect on January 1, provides for new rules on when individuals are required to take minimum distributions from their retirement accounts. The bill also reduces penalties on required minimum distributions (RMD), and paves the way for major changes to how retirees can use their Roth 401(k) accounts.
Secure 2.0 represents one of the biggest and most impactful retirement law changes in years. Read on to learn more about it and how it may impact you and your family:
Secure 2.0 is the name given for new retirement laws that took effect on January 1, 2023. Secure 2.0 represents a major shift in some long-tenured features in retirement plans.
While some analysts have said that the bill could help reduce taxes for some individuals, it’s still unclear whether that’s the case. Indeed, it’s far more likely that the tax impact on individuals will vary depending on each person’s unique circumstances.
One of the key features in Secure 2.0 centers on the required minimum distribution. If you’re unaware, RMD means that when you have a retirement account and hit a certain age, tax law requires you to take the required minimum distribution, a set amount, from your account. If you don’t take the RMD, you get hit with a penalty.
Prior to Secure 2.0, the RMD requirement started at the age of 72. And if individuals didn’t take the RMD, they’d be forced to pay a tax of 50% of the RMD that they were supposed to take out during that calendar year.
With Secure 2.0 now in effect, the RMD age has been upped to 73. Starting in 2033, the RMD age will increase to 75. Additionally, the penalty individuals will face if they don’t take the RMD has been reduced to 25% of the RMD amount.
In another important switch, Secure 2.0 exempts Roth 401(k) plans from RMD requirements. Therefore, anyone who currently has a Roth 401(k) will no longer need to take anything from their accounts, regardless of age.
Additionally, Secure 2.0 allows for individuals to contribute up to $22,500 per year into their Roth 401(k) accounts, up from $20,500 last year. If you’re 50 years old or older, you can make catch-up contributions on top of that limit of $7,500 per year, up from $6,500 last year.
Speaking of catch-up contributions, Secure 2.0 will allow for people to make a catch-up contribution of $10,000 to retirement accounts starting in 2025. However, that will only apply to individuals between the ages of 60 and 63. And if you have an individual retirement account (IRA) and you’re at least 50 years old, you can make an annual catch-up contribution of $1,000 to your account.
Note that catch-up contributions are affected by inflation and may change as inflation changes in the coming years.
Although many of the Secure 2.0 changes affect individual taxpayers, there are also implications for businesses that companies should consider.
Under the new rules, employers who take on new 401(k) or 403(b) plans will be required to auto-enroll all eligible employees and provide a contribution of 3% or more. Employers will also need to increase their contribution rates by 1%, up to a maximum of 10% in subsequent years. Employers are required to start on the new program in 2025.
Secure 2.0 has also modified part-time employee requirements by now allowing anyone who has worked for a company for two years and has had at least 500 hours of work performed for the company each year to also enroll in company retirement plans. Previously, part-time employees were allowed to enroll in retirement plans after three years of service.
Clearly, there are a lot of considerations to think about with Secure 2.0. Before you make any changes to your retirement plans or how you handle retirement plans for companies, consider giving Perlson a call at 516-541-0022 to discuss how Secure 2.0 impacts you.
New York State has launched a program that aims at helping you secure the funding you need.