Major retirement plan changes resulted from the passage of the SECURE 2.0 Act last year, and starting January 1st of 2023, there are 92 new provisions that went into effect. We have selected several of the more significant changes that will shape the savings and retirement landscape of employers and employees alike.
Contribution Limit Increases
Catch-up contribution limits for individuals 50 years and older, were increased to $7,500 in 2023. Starting January 1st of 2025, catch-up provisions allow for individuals ages 60 to 63 to make an additional $10,000 (inflation-adjusted) in contributions to their workplace retirement plan each year. Income levels will determine whether pre or post-tax contributions are permitted (After-tax Roth contributions will be required if income levels are above $145,000).
Matching Options Expanded
Employer contribution options have been vastly expanded to accommodate the unique demands of the ever-evolving job market. Employer matching contributions have now become Roth eligible, and in-plan Roth Required Minimum Distributions (RMDs) are exempted from lifetime requirements. Additionally, student loan payments are now eligible for an employer-sponsored matching contribution into a company retirement plan on behalf of the participant. This effort aims to help new labor force participants reduce their current debt burden while still saving for retirement.
Adjustment to RMD Schedules
The age at which RMDs must commence was raised from 72 to 73 years old as of the first of this year. Starting in 2033 however, the new RMD commencement age will be 75 years old. In addition, the excise (penalty) tax on missed distributions was reduced from 50% to 25%. If the previously missed distribution is reported and corrected on a tax return, the penalty is further reduced to 10% of the required distribution. Lastly, starting in 2024, Roth accounts held in employer-sponsored retirement plans will become exempt from RMDs.
529 Plan Conversions
Legacy 529 accounts, once open for more than 15 years, are eligible to roll over unused balances into a Roth IRA account. Beneficiaries are permitted an aggregate lifetime contribution limit of $35,000 into Roth IRAs from 529 accounts. Keep in mind, all rollovers are counted towards annual Roth IRA contribution limits and beneficiaries must have earned income at least equal to the amount of the rollover. Lastly, 529 contributions made within the last five years are ineligible for a tax-free transfer to Roth accounts.
Qualified Charitable Distributions (QCDs)
QCDs historically were limited to direct, tax-free gifts, made from a donor’s IRA to an eligible charity, thus satisfying annual RMD requirements dollar for dollar. Beginning in 2023, an individual over 70 ½ years old may make a one-time QCD of up to $50,000 into a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. The amount contributed will satisfy annual RMD requirements dollar for dollar, while also establishing a lifetime income stream. Limitations apply as not all charities are eligible and contributions must be made directly from an IRA into the specific charitable remainder vehicle of choice.
Qualified Longevity Annuity Contracts (QLACs)
QLACs are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that begin payments on or before age 85. The dollar limitation for premiums increased to $200,000 from $145,000 as of the first of this year. Effectually, an amount of up to $200,000 is withdrawn from a retirement account so as not to be included in RMD calculations, and an income stream is purchased via a deferred annuity. These deferred cashflow techniques whereby a commercial insurance company guarantees a lifetime income, are designed to defend against longevity risk – the real threat many seniors face of outliving their retirement savings.
Many additional provisions were made in the SECURE 2.0 Act legislation, these are just a few of the key changes. Keep in mind that for changes in workplace retirement plans, such updates may require the plan sponsors and administrators to accommodate such changes. As always, please give us a call to discuss this further as we would love to hear from you.