Just before the Christmas holiday, President Biden signed into law the Secure Act 2.0. This was just a portion of the $1.7 trillion (yes, with a ‘T’) spending package, and has some significant changes to retirement savings strategies. Here are some key highlights:
Automatic Enrollment in 401(k)/403(b) – Participants will still have the option to opt out but starting in 2025 all new 401(k) & 403(b) plans must automatically enroll participants to contribute to the plan. The minimum automatic enrollment rate is 3% of participant income and must include an annual automatic increase to participant contributions of 1%.
Small Business Startup 401(k) Credit – Beginning in 2023, the startup credit for small businesses (less than 100 employees, phasing out with employees between 50-100) is now 100% of startup costs. The credit is also limited to $1,000 per employee. What this means is an employer with 10 employees looking to start a 401k, could receive up to a $10,000 tax credit to cover startup costs for that 401k.
RMD Age Goes Up – Starting in 2023, RMDs will begin at age 73. Starting in 2033, the age RMDs will begin rises to age 75.
Increased Catch-Up Contributions in Your Early 60s – In 401(k) accounts, the current catch-up contribution is $6,500. Starting in 2025, the catchup limit will be the greater of $10,000 or 50% more than the current catch-up contribution. This also applies to SIMPLE IRAs that have a lower catch-up contribution limit.
Small Immediate Financial Incentives for Contributing to a Plan – File this under strange… This now allows employers to offer ‘de minimus’ financial incentives to employees for joining the plan. The Act gives an example of ‘low-dollar gift cards’.
529 to Roth IRA – Starting in 2024, a 529 beneficiary can roll over up to $35,000 from their 529s to a Roth IRA. These rollovers take the place of the ability to contribute to a Roth IRA, so an individual could not double dip and max their IRA contribution plus roll over money from the 529. There are additional rules here, such as, the 529 must have been in place for at least 15 years. This could allow for a boost for young investor starting a Roth IRA!
RMD Penalty – Under prior law, if an individual did not withdraw their Required Minimum Distribution from their IRAs, the tax penalty was 50%! Starting in 2023, this penalty is now 25%… One suggestion, please make sure RMDs are being satisfied even with this reduced penalty!
No More Roth 401(k) RMDs – A lesser-known rule was that Roth 401(k) accounts still had to take a Required Minimum Distribution (even though a Roth IRA does not). Starting in 2024, Roth 401(k) accounts will also no longer have RMD requirements.
Roth SIMPLE & Roth SEP IRAs – Starting 2023, SIMPLE IRAs and SEP IRAs will now allow for Roth contributions, a substantial improvement for these valuable small business retirement vehicles!
Limitation on Conservation Easement Deductions – For many wealthy families, there is a tax & planning strategy involving gifting land to conservation easements. (For our Yellowstone fans, you may recognize this term) Starting in 2022 (yes, that is backward looking) if certain thresholds are not attained, which include, the contribution meeting a 3-year holding period, substantially all of the contributing partnership is owned by family, or the contribution relates to the preservation of a historical home, there will be a 2.5X limit on deductions.
The entire Secure Act 2.0 is 140 pages, so this is only meant to provide a snippet of key points in the Act. But if any of these provision lead to additional general questions or questions about your personal retirement strategy, the iNNOVA Wealth Partners team is here to help.
INNOVA is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. INNOVA is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.