Secure Act 2.0: The Impacts to Individuals and Small Business Owners Now and In the Future

By:  Nicole T. Strbich, CFP®, CPWA®, EA - Managing Director of Financial Planning

Legislation known as the “SECURE Act 2.0” was included as a part of the bigger Consolidated Appropriations Act of 2023, which was signed into law on December 23, 2022.   This act is a follow-up to the original SECURE act passed in 2019 that made several significant changes to retirement planning, including how people can inherit retirement accounts to the age for Required Minimum Distributions.  This article will provide information on several of the changes included in this recent bill. 

Required Minimum Distributions:  

The age for Required Minimum Distributions (RMDs) has increased with this bill, the full extension phasing in over a decade.  If you were born between 1951 – 1959, your RMD age is now 73.  If you were born in 1960 or later, your RMD is now at age 75.   Essentially, the current age for RMDs is now at age 73 and in the year 2033, RMDs will start at age 75. 

529 to Roth Transfers:  

Starting in 2024, taxpayers may be able to transfer funds from their 529 account into their Roth IRA.  Several requirements will apply – the 529 must have been maintained for at least 15 years, contributions to the plan made in the last 5 years are not eligible, the Roth IRA must be in the name of the beneficiary of the 529 plan, the annual Roth contribution limit still applies to these transfers (and includes any direct Roth contributions), and the lifetime maximum transfer is $35,000.

Roth Option for SIMPLE IRAs and SEP IRAs:  Starting in 2023, taxpayers who participate in a SIMPLE IRA plan or a SEP IRA plan can elect to make their deferrals on an after-tax basis as “Roth” contributions. 

Roth Matching and Catch-Up Contributions:  

Starting in 2023, employers will be permitted to deposit matching or non-elective contributions to employees’ designated Roth accounts.  

Additionally, starting in 2024, this law creates a mandatory Roth requirement for taxpayers who have wages in excess of $145,000 (which will increase with inflation going forward) and are making catch-up contributions as they are age 50 and above.  This essentially forces taxation of these contributions at the time of deferral, whereas before the taxpayer had the option to make a choice of how it would be treated. 

Increases to Contribution Limits:  

Starting in 2024, the IRA catch-up contributions available for individuals 50 and over will start to increase with inflation.  Additionally, starting in 2025, catch up contributions for individuals in employer plans (like 401(k)s and 403(b)s) who are age 60-63 will increase to $10,000 or 150% of the regular catch-up contribution amount – whichever is greater.  

Startup Plan Tax Credits:

Starting in 2023, employers with 50 or fewer employees are eligible for a credit of 100% of the startup and ongoing service fees paid by the employer for the plan’s first 3 years.  The 100% credit is an increase from 50% but will still be capped at $250 times the number of non-highly compensated employees, up to $5,000.  Employers with 51-100 employees are still eligible for a credit at 50% of the costs and all employers with less than 100 employees have access to an additional tax credit of $500 for startup plans with an automatic enrollment provision.  

Separately, there is also a tax credit for employer contributions that is in addition to the tax credit for expenses.  In 2023, employers with 50 or fewer employees will get a tax credit based on the employer contributions made for employees during the first five years of a new plan.  Employees with gross wages less than $100,000 will be able to be included in the calculation for this credit.  In year 1 the credit is 100% of contributions, in year 2 the credit is 100% of contributions, in year 3 the credit is 75% of contributions, in year 4 the credit is 50% of contributions and in year 5 the credit is 25% of contributions.  Each year has an applicable cap of $1,000 per employee.  Employers with 51-100 employees are eligible for this credit, but at a reduced rate and with a different formula.

Auto Enrollment in 401ks:  

Employers who start up a new 401(k) in 2025 or later will be required to automatically enroll employees at a rate between 3% and 10%, with automatic increases until it reaches a rate between 10% and 15%.  Employers with 10 or fewer employees and plans started prior to 2025 will be exempt from this requirement.  

As an additional way to prompt participation, in 2023 employers will be allowed to offer small financial incentives to employees who enroll in the plan.  The maximum amount of these gift cards or awards is yet to be determined. 

We hope this update was helpful, please contact our team at Buckingham Advisors if you have any questions or if we can be of any assistance.