Some big changes to 401k plans were announced recently.
We wanted to take a moment and send you a quick note that we are aware of, and are working through, the changes that were announced as part of the Secure Act 2.0 which may affect the 401k plan.
As with most changes to the tax code, it will take some time for the IRS to release guidance on how to handle new rules. We can discuss more on how these changes affect your plan, either by phone or by setting a new, or already scheduled plan review.
Some key updates as part of the Secure Act 2.0:
- Starting in 2023
- SEP IRAs and Simple IRAs will offer a Roth investment option.
- Starting in 2024
- Employees can choose for their employer matches to be deposited as a Roth 401k.
- Employers can help workers make student loan payments in lieu of a 401k match.
- Roth 401k’s are no longer required to send out RMDs for workers over age 72.
- The catch-up contributions ($7,500 for 2023) will be required to be a Roth contribution for prior-year wage earners less than $145,000.
- The new Starter 401k plan is established for small businesses.
- Part-time worker eligibility rules are changing down to 500+ hours after 2 years to qualify for employee plan enrollment.
- Starting in 2025
- Additional catch-up contributions for ages 60-63 increased to $10,000 or 150% of pay.
- Auto-enrollment is required for certain new employer retirement plans.
As a reminder, there is no such thing as free money, and many of these changes will affect how taxes are allocated and payroll taxed. There’s a lot of work ahead for the IRS, so we will keep you updated as guidance is announced.
Here is a good article posted by Barron's that outlines in a little more detail.
The Secure Act Will Change Retirement Policy. 6 Big Changes That Will Soon Become Law.
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Now that the Senate has passed a sweeping spending bill to fund the federal government into next year and avert a shutdown, advisors are cheering a major overhaul of the rules around retirement savings that was included in the package.
The so-called Secure 2.0 Act, the successor to a landmark 2019 retirement bill,enjoyed broad support in the wealth management industry, with trade groups like the Investment Adviser Association and the Insured Retirement Institute lobbying for its passage. Here are the major changes:
Raising the age for required minimum distributions. The original Secure Act increased the required minimum distribution, or RMD, age to 72. The new bill stretches that increase out further, bumping up the RMD age initially to 73, and eventually raising it to 75. Advocates of the move argued that it's a necessary step to help ensure that people don't outlive their retirement savings.
Auto-enrollment in 401(k) plans. The authors of the bill note that workplace retirement savings plans are a key ingredient to boosting savings rates, but even when a plan is available, many employees don't opt in. Secure 2.0 tries to fix that by mandating that 401(k) and 403(b) plans automatically enroll employees, setting a minimum default contribution rate of at least 3%, but not more than 10%. Employees would have the choice of opting out.
Catch-up contributions. Workers who haven't saved enough for retirement throughout their careers sometimes scramble to make up the shortfall as they approach the end of their working life. The bill increases the limits for making so-called catch-up contributions for employees ages 60 through 63. Starting in 2025, the limit for catch-up contributions for savers in that age range would increase from $7,500 a year to at least $11,250.
Support for small businesses to offer retirement plans. Small employers already can take advantage of a credit to help defray the administrative costs of setting up a retirement plan. The new bill increases the credit from 50% to 100% for businesses with up to 50 employees, effectively eliminating one of the biggest barriers to offering a workplace plan. An additional credit is available that "generally will be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000″ for the smallest employers, according to a summary of the bill. These credits phase down over time and are no longer available after five years.
Help for student loan debt. The burden of student loan debt can be a major impediment to saving for retirement. After all, with an average borrower saddled with more than $37,000 in federal loan debt, it can be hard to pay that down while also putting money away for retirement. The Secure 2.0 Act permits employers to make matching contributions to a retirement plan based on qualified student loan repayments. So even if a borrower can't afford to contribute money to a retirement plan, they can still start building a nest egg through their employer match.
Access for part-time workers. The Secure 2.0 Act builds on its predecessor's efforts to expand access to workplace plans for part-time employees. The earlier bill had said that part-time employees must be permitted to enroll in a retirement plan if they either work 1,000 hours in one year, or 500 hours in three successive years. The new bill reduces the so-called 500-hour test to two years.
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