In the final days of 2022, Congress passed a new set of retirement rules designed to facilitate contribution to retirement plans and access to those funds earmarked for retirement.
The law is called SECURE 2.0, and it is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019.
The sweeping legislation has dozens of significant provisions many of which have been rolled out. Below are some of the major provisions of the law coming into force this year and in 2025.
New Distribution Rules
Required minimum distribution
(RMD) age will rise to 73 years in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking RMDs. Further, starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. However, if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.1
Access to funds.
- Plan participants can use retirement funds in an emergency without penalty or fees. For example, 2024 onward, an employee can take up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.2
Reduced penalty
- Starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25 percent from 50 percent. If you promptly fix the mistake, the penalty may drop to 10 percent.3
New Accumulation Rules
Catch-up contributions
- From January 1, 2025, investors aged 60 through 63 years can make annual catch-up contributions of up to $10,000 to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals with annual earnings more than $145,000.4
Automatic enrollment
- In 2025, the Act requires employers to automatically enroll employees into workplace plans. However, employees can choose to opt-out.5
Student loan matching
- In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.6
Expiration of TCJA Provisions
- Many provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025, which could lead to higher tax rates and reduced deductions for both individuals and businesses if Congress does not act to extend or modify these provisions (Tax Foundation) (FedSmith.com).
Estate and Gift Tax Exemptions
- The anticipated reduction in estate and gift tax exemptions will significantly affect estate planning strategies, necessitating proactive planning to optimize tax positions before the provisions sunset (FedSmith.com).
Revised Roth Rules
529 to a Roth
- Beginning this year, pending certain conditions, individuals can roll a 529 education savings plan into a Roth individual retirement account (IRA). Therefore, if your child receives a scholarship, goes to a less expensive school, or does not go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are also allowed under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.7
Roth 401(k)s and Roth 403(b)s
- The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth IRA rules. Beginning this year, the legislation no longer requires minimum distributions from Roth accounts in employer retirement plans.9
How Can Businesses Prepare
Increased Catch-Up Contributions
Implication
- Business owners must update their retirement plan policies to accommodate higher catch-up contributions for employees aged 60-63, increasing from $7,500 to $10,000 annually.
Action Required
- Plan administrators will need to revise contribution limits and communicate changes to eligible employees
Automatic Enrollment in Retirement Plans
Implication
- Employers are required to automatically enroll employees into workplace retirement plans, though employees can opt-out.
Action Required
- Businesses must ensure their payroll systems and HR policies comply with the new automatic enrollment rules and provide clear opt-out instructions to employees.
Student Loan Matching Contributions
Implication
- Employers can match employee student loan payments with retirement contributions, offering an incentive for employees to save for retirement while paying off student loans.
Action Required
- Companies will need to set up mechanisms to track student loan payments and make corresponding retirement contributions, potentially enhancing their benefits package to attract and retain talent.
Expiration of Tax Cuts and Jobs Act (TCJA) Provisions
Implication
- Many TCJA provisions are set to expire at the end of 2025, which could result in higher tax rates and reduced deductions for both individuals and businesses if Congress does not extend or modify these provisions.
Action Required
- Business owners should review their tax strategies and consider potential changes to mitigate the impact of expiring tax provisions.
Reduction in Estate and Gift Tax Exemptions
Implication
- Anticipated reductions in estate and gift tax exemptions will affect estate planning strategies, requiring proactive planning to optimize tax positions.
Action Required
- Business owners should consult with tax and estate planning professionals to adjust their plans in light of the new exemption limits.
Wealth Advisory Lab Can Help
Is your business fully prepared for these significant changes, we work with your existing team of advisors to ensure your updates are coordinated and on point to get you the best possible outcomes. Schedule a consultation or reply directly to this email with your availability.
Let’s discuss how we can navigate these legislative updates together and optimize your business strategy for 2025 and beyond.