Patrick Horning is a senior director of Advanced Planning at Northwestern Mutual.
Lawmakers recently passed new legislation to make saving for retirement easier. On December 29, President Biden signed a $1.7 trillion budget bill, which includes the Securing a Strong Retirement Act of 2022, or SECURE Act 2.0, which builds on the changes made to the retirement system by 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act.
The bill’s retirement savings package aims to reshape the structure of most Americans’ 401(k), 403(b), and IRA plans by making the process of contributing to and withdrawing from retirement savings plans easier. Regardless of whether you’re at the beginning, the middle or nearing the finish line of your professional life, this legislation will likely affect your financial planning in some way.
Though not all of the changes will take place right away, here are some key highlights to know now about how the many provisions in this legislation could impact your retirement savings.
Highlights of the SECURE Act 2.0
Important changes for younger workers
Automatic enrollment increased. Beginning in 2025, the bill would expand automatic enrollment in retirement plans with the aim of prompting more people to save for retirement. With some exceptions for small businesses, the bill requires 401(k) and 403(b) plans to automatically enroll eligible participants, starting at a minimum 3 percent contribution and increasing annually to at least 10 percent but no more than 15 percent. Employees who do not wish to enroll will be required to opt out.
Withdrawals allowed for emergency expenses. Beginning in 2024, qualified plan participants will be able to take a penalty‐free distribution of up to $1,000 once per year, which won't be subject to the usual additional 10 percent tax that applies to early distributions. However, if you do not repay the distribution within a certain time frame, you will have to wait three years before being allowed to take another emergency distribution.
Matching contributions extended to those paying student loans. Beginning in 2024, employers will be permitted to make qualified retirement plan contributions to employees who are not contributing to the plan if that employee is making qualified student loan payments.
Pertinent provisions for older workers
Required minimum distribution age raised. Currently, you generally must take required minimum distributions (RMDs) from your retirement plan beginning at age 72. But beginning January 1, 2023, the bill will increase the required minimum distribution age to 73 to better reflect current life expectancies. In 2033, the RMD age will move to 75.
However, as currently presented, there appears to be a drafting error in which those born in 1959 meet both the age 73 and age 75 definitions. This will need to be corrected in future legislation, although we do not yet know what form the correction may take.
Catch-up contribution limits boosted. Right now, people who are 50 or older can make additional contributions to their qualified retirement plans. Beginning in 2025, these “catch-up” contributions would be increased to $10,000 per year or 50 percent more than the regular catch‐up contribution amount — whichever is greater — for those who turn age 60, 61, 62 or 63 during a given year. After 2025, those amounts will be indexed for inflation.
The catch-up contribution amount for individual retirement accounts (IRAs) is currently set at $1,000 and does not adjust for inflation. Beginning in 2024, the legislation would index the IRA catch-up contribution for inflation in $100 increments.
Expanded Roth rules. Beginning in 2023, Roth contributions can be made to both SIMPLE IRA and Simplified Employee Pension (SEP)-IRA plans and employer matching contributions to a qualified retirement plan can be made to a Roth account. Defined contribution plans can provide participants the option of treating matching contributions as Roth contributions.
Beginning in 2024, required minimum distributions from designated Roth accounts will be eliminated and all catch‐up contributions to qualified retirement plans will be treated as Roth contributions. An exception is available for employees with compensation of $145,000 or less (indexed for inflation). The ability for taxpayers to decide whether they want to fund any or all their retirement accounts with pre-tax or Roth contributions is a definite positive.
Penalty-free rollovers from 529 plans. Also in 2024, a new provision will allow tax‐ and penalty‐free rollovers from 529 accounts to the 529 plan beneficiary’s Roth IRA (capped at $35,000 over the beneficiary’s lifetime and subject to annual Roth contribution limits). The 529 plan must have been open for at least 15 years.
Qualifying longevity annuity contracts. Effective for contracts purchased or received in an exchange on or after its date of enactment, the bill will repeal the requirement that qualifying longevity annuity contracts’ (QLAC) premiums be limited to 25 percent of the account balance. It also increases the QLAC premium dollar limitation from $125,000 to $200,000 (indexed for inflation).
Qualified charitable distributions. Beginning in 2024, the bill will expand qualified charitable distributions (QCDs) to allow a one‐time, $50,000 distribution to certain split‐interest giving trusts. The act also indexes the $100,000 IRA qualified charitable distribution limit for inflation.
Unseen tax implications
Overall, the SECURE Act 2.0 contains a number of positive provisions to encourage taxpayers to save more for retirement. But there is some not-so-good news to consider: The mandatory Roth treatment for qualified plan catch-up contributions for those who earn more than $145,000 annually could be an unseen tax for high-income earners.
Whenever there are significant legislative changes, it’s a good idea to consult with a tax professional — or consider working with a financial advisor who can help ensure you are taking advantage of all the opportunities available to enhance your personal financial plan.
This publication is not intended as legal or tax advice. This information is intended solely for the information and education of Northwestern Mutual financial representatives, their customers, and the legal and tax advisors with whom they work. It must not be used as a basis for legal or tax advice and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer.
As an attorney in Sophisticated Planning Strategies, I work with Northwestern Mutual financial advisors as they help clients achieve financial security.
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