The SECURE 2.0 Act Provides New Retirement Savings Options in 2024
In December 2022, the SECURE 2.0 Act was enacted, introducing major amendments to retirement savings-related tax legislation in the United States. Some of these changes took effect in 2023, while others were scheduled for 2024.
Changes and New Retirement Saving Features of Secure 2.0
There are many changes and new clauses brought into being brought about by the legislation. So let’s delve into some of the key things that took effect this year.
Student Loan Payment Matching
Employees who are repaying student loans can now receive matching contributions from their employers to their workplace retirement plan, as though the loan repayments were being made directly to the plan. While employers are not obligated to match contributions, this provision allows them the option to offer student loan repayment matching as a bonus benefit. This is especially helpful for individuals who are paying off student loans and may find it challenging to save for retirement. This applies to 401(k), 403(b), and government 457(b) plans, as well as SIMPLE IRAs.
New Exceptions for Early Withdrawal
Withdrawals from tax-deferred accounts like IRAs and 401(k) plans before the age of 59½ could result in a 10% early distribution penalty, in addition to regular income tax. However, two new exceptions to this penalty were introduced in 2024.
Emergency Expense Withdrawals
Once a year, individuals can withdraw up to $1,000 from their account without incurring a penalty for personal or family emergencies. However, within a three-year span, no more emergency withdrawals are permitted unless the withdrawal is replaced or new contributions equivalent to the withdrawal are made.
Domestic Abuse Withdrawals
Victims of domestic abuse are allowed to make a penalty-free withdrawal of an amount equal to the lesser of $10,000 (adjusted for inflation) or 50% of the account value, provided they can verify that they have been abused within the preceding year.
Creation of Emergency Savings Accounts
Employers are now allowed to establish an emergency savings account tied to a workplace retirement plan for non-highly compensated employees. Employee contributions are made post-tax and cannot exceed 3% of their salary, with a maximum account limit of $2,500 (or a lower limit set by the employer). While employers can match contributions up to the cap, any matching funds are deposited into the employee’s workplace retirement account.
Clarification of RMD Ages
With the SECURE 2.0 Act, the initial age for required minimum distributions (RMDs) from traditional IRAs and most workplace plans was increased from 72 to 73 in 2023 and will further increase to 75 in 2033. However, the language of the law was unclear. Congress has since clarified that the age of 73 applies to those born between 1951 and 1959, while the age of 75 applies to those born in 1960 or later. This clarification is set to become law in early 2024 as part of a bill correcting several technical errors.
Elimination of RMDs From Roth Workplace Accounts
Previously, RMDs were required from designated Roth accounts in workplace retirement plans even though they did not apply to original owners of Roth IRAs. This requirement was abolished starting in 2024.
Transferring Funds From a 529 College Savings Account to a Roth IRA
Starting in 2024, beneficiaries of 529 college savings accounts, who may be left with unused funds, can transfer these funds directly from their 529 account to a Roth IRA. This can be done up to a lifetime limit of $35,000, as long as the 529 account has been open for more than 15 years. However, since these transfers are subject to Roth IRA annual contribution limits, it may take several transfers to reach the $35,000 limit.
Increased Limits for SIMPLE IRA or 401k Plans
Employers can now make additional non-elective contributions to SIMPLE IRA or SIMPLE 401(k) plans. The contribution limit is the lesser of $5,000 or 10% of an employee’s salary, as long as the contributions are made uniformly to all eligible employees. The limits for elective deferrals and catch-up contributions, currently set at $16,000 and $3,500 in 2024, can be increased by an additional 10% for a plan offered by an employer with 25 employees or fewer. Employers with 26 to 100 employees can also raise their limits, provided they offer either a 4% match or a 3% non-elective contribution.
Inflation Adjustment for QCDs
Qualified charitable distributions (QCDs), which allow taxpayers aged 70½ or older to distribute up to $100,000 annually from a traditional IRA to a qualified public charity tax-free, are now indexed for inflation starting in 2024, with the limit set at $105,000.
The SECURE 2.0 Act also introduced a one-time opportunity effective 2023, to use up to $50,000 of one’s annual QCD to fund a charitable gift annuity or charitable remainder trust. This limit, too, is indexed for inflation starting in 2024, and the limit is $53,000.
Catch-Up Contributions: Indexing, Delay, and Correction
From 2024 onwards, the cap on catch-up contributions to Individual Retirement Accounts (IRA) for those age 50 and up will be pegged to inflation. This could potentially provide extra savings opportunities in the future. Nevertheless, the cap remains unchanged for 2024, retaining the $1,000 limit. It should be noted that the limit for catch-up contributions to 401(k)s and similar employer-sponsored plans, currently set at $7,500 for 2024, was already inflation-indexed.
The SECURE 2.0 Act contains a clause that was supposed to come into effect in 2024, mandating that Roth-based catch-up contributions be made to workplace plans for employees earning over $145,000 per year. However, in August 2023, the IRS declared a two-year “administrative transition period,” effectively postponing this requirement until 2026. In the same announcement, the IRS confirmed that catch-up contributions will still be permitted in 2024 despite a possible interpretation of a change related to this clause that could potentially prohibit such contributions. The legislative error will be rectified in the 2024 technical legislation.