The expansive $1.66 trillion Consolidated Appropriations Act of 2023, ratified by President Biden on December 29, 2022, unfolds over 4,155 pages and embeds significant changes to retirement tax provisions via the SECURE Act 2.0 of 2022. Here are the key points of interest:
Mandatory Enrollment in Employer Retirement Plans
Beginning in tax year 2025, newly instituted 401(k) and 403(b) plans must automatically enlist employees, earmarking between 3% and 10% of their wages, with an automatic annual increment of 1% until a 10% contribution is reached. Employees have the option to contribute up to 15%. Exemptions include companies less than three years old, existing businesses with established plans, small businesses with fewer than ten employees, and church or government plans.
Introduction of Starter 401(k) Plans
From the end of 2023, employers without existing retirement schemes can offer starter 401(k) plans with automatic enrollment of employees contributing a minimum of 3%, alongside provision for catch-up contributions for those aged 50+.
Federal Matching for Saver’s Credit
Effective 2027, qualifying taxpayers making contributions to IRAs or workplace 401(k)s may receive a 50% match from the federal government, up to $2,000, directly deposited into their retirement accounts. Eligibility for this match excludes dependents, full-time students, nonresident aliens, and phases out at higher income levels.
Provisions for Emergency Savings and Withdrawals
Employers can establish linked emergency savings accounts within retirement plans, allowing employees to contribute up to 3% of their salary or $2,500, whichever is less. Additionally, 2024 will see the option for employees to make one penalty-free withdrawal of up to $1,000 annually for emergency expenses from their 401(k). Moreover, the additional 10% tax penalty on early withdrawals will be waived for domestic abuse victims, terminally ill individuals, and those affected by qualified disasters from 2024.
Recognition of Student Loan Payments
Starting in 2024, student loan repayments will qualify for employer-matching retirement contributions as if they were regular retirement plan contributions.
Inclusion of Part-Time Workers
Part-time workers will be eligible for 401(k) plan participation after two years of service, with each 12-month period with 500+ hours of service counting as a year of service, beginning in 2025.
Adjustments for IRA Catch-Up Contributions
Catch-up contributions will be inflation-indexed from the end of 2023. Substantial increases for those aged 60-63 will be introduced after 2024, subject to cost of living adjustments.
Alteration of Required Minimum Distributions (RMDs) Ages
RMDs will now commence at age 73 for those who turn 72 after 2022 and before 2033, and at age 75 for those reaching 74 after 2032.
Modifications to Roth IRA and 401(k) Rules
As of 2023, employer matches can be directed to either a Roth 401(k) or a regular 401(k). Elimination of RMDs for Roth 401(k)s begins in 2024. High earners over the age of 50 with incomes above $145,000 must direct their catch-up contributions to a Roth account from 2024, with inflation adjustments to this threshold beginning in 2025.
Rolling Over 529 Plans to Roth IRAs
Starting in 2024, 529 plan funds can be transferred to a Roth IRA under certain conditions, subject to a $35,000 lifetime limit and Roth IRA annual contribution caps.
Updated Guidelines for Qualified Charitable Distributions (QCDs)
From 2024, the annual cap for QCDs will be adjusted for inflation, allowing individuals to direct IRA funds to charities and count them towards RMDs.
This legislation manifests a substantial evolution in retirement planning and savings, intending to enhance the financial security of Americans as they approach and enter retirement.
