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Sweeping New Law Changes Retirement Planning In 2023
Major legislative changes affecting retirement planning are expected to be signed into law by President Biden before the end of the year. The dozens of changes make tax and retirement planning even more complicated but represent substantive steps by the U.S. Government to prevent the retirement funding crisis Americans face from growing worse.
The new law, SECURE Act 2.0, expands on the Setting Every Community Up For Retirement Enhancement (SECURE) Act, which was signed by President Donald Trump in December 2019. SECURE 2.0 is contained in the massive $1.7 trillion Consolidated Appropriations Act of 2023. The omnibus 4,000-plus page bill funds the federal government through September 30, 2023, contains provisions addressing numerous national priorities, such as aid to Ukraine and funding federal disaster aid, as well as ameliorating the retirement funding crisis for Americans.
Some of the new rules will become effective in 2023, while others will not kick in for many years. Here's a summary of key provisions of SECURE 2.0 affecting retirement planning for individuals:
- Under current law, you are required to start taking distributions every year from an IRA or QRP at age 72. Under SECURE 2.0, required minimum distributions (RMDs) gradually rise from 72 to 75. For the 2023 tax year, the beginning RMD age rises to 73, rises again to 74 in 2030 and once more to age 75 in 2033.
- Automatic enrollment in a retirement plan will be required of new retirement plans created by employers after 2024. Enrollment of employees will not require action by employees; workers will automatically be enrolled in plans. An employee can choose to opt out of a 401(K) or other qualified retirement plan (QRP). Employers will be required to make contributions equal to or greater than 3% a year of an employeeā€™s wages. An employer can match contributions equal to as much as 10% of your wages. In addition, SECURE 2.0 requires large employers to escalate the amount they contribute to your retirements by 1% every year until it is 10%.
- A ā€¯catch-upā€¯ provision enabling those age 50 or older to contribute additional amounts to their federally tax-advantaged QRP is expanded. Beginning Jan. 1, 2025, plan participants ages 60 through 63 will be allowed to make catch-up contributions of up to $10,000 or 150% of the regular contribution, whichever is greater. That catch-up amount will be indexed to inflation annually.
- Under SECURE 2.0, employers can provide gift cards and other incentives worth up to $100 to encourage employees to participate in a QRP in 2023. This was previously prohibited.
- SECURE Act 2.0 permits employers to include part-time employees to join a QRP after two consecutive years of employment instead of three, as of 2023.
- Small businesses with up to 50 employees are eligible for a credit on 50% of the cost of starting a QRP for employees. Under the new law, the credit rises in 2023 to 100%. The increased credit does not apply to defined benefit plans.
- Military spouses often do not qualify for participating in an employer sponsored retirement plan because they must relocate more than most Americans. Under SECURE 2.0, small employers in 2023 are eligible for tax credits for immediately allowing military spouses to participate in a QRP.
- Student loan payments made by an employee, starting in 2024, are eligible for a matching contribution by employers. For individuals with student loan payments who often find it difficult to contribute to their QRP, this provision attempts to make retirement funding less onerous.
- A tax credit that makes it easier for lower income households to save in IRAs and 401(k)s will be expanded from $1,000 (married joint-filers) to $2,000 in 2027. The tax credit is reduced on income of $41,000 and entirely eliminated at more than $71,000.
Planning for 2023 will be changed in many ways, large and small, by enactment of SECURE 2.0 and we will keep you posted here as the full implications become clearer.
Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. You should consult the appropriate financial professional regarding your specific circumstances.
The material represents an assessment of financial, economic and tax law at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.