The Secure 2.0 Act aims to improve America’s retirement system by reducing the retirement savings gap – the deficit between how much people have saved for retirement and how much they actually need to retire. With some major changes to laws surrounding retirement accounts, the act will affect nearly everyone in one way or another. To help your clients stay informed, you should be familiar with the main provisions of the act, especially those that could impact your clients’ taxes.
Key points of the Secure 2.0 Act
While this isn’t an exhaustive list of everything included in the Secure 2.0 Act, these are some of its most notable provisions:
Previously, required minimum distributions (RMDs) from IRAs and workplace retirement plans began at age 72. The Secure 2.0 Act increased the minimum age to 73, allowing people to take another year before drawing from their retirement accounts if they choose.
The act also eliminates RMDs for Roth 401(k)s. RMDs exist partially to ensure that the government eventually gets to collect taxes on the pre-tax contributions that fund the account. Since Roth accounts are funded by after-tax contributions, an RMD for Roth 401(k)s was unnecessary.
Higher Catch-up Contribution Limits
An increase in catch-up contribution maximums will help individuals aged 50 and up meet their retirement goals. Currently,
Another major change to catch-up contributions is the mandatory switch to after-tax dollars for individuals who make over $145,000. At the moment, people can send their catch-up contributions to pre-tax or after-tax retirement accounts. Starting in 2024, anyone who makes more than $145,000 will only have the option to send their catch-up contributions to Roth accounts.
“The ability to put more income to work in a tax-advantaged retirement savings plan not only boosts retirement savings but also reduces current taxable income,” says Sarah Darr, head of financial planning at U.S Bank Wealth Management. As a result, some individuals may be able to avoid moving into a higher tax bracket by deferring a larger chunk of their salary and taking advantage of expanded catch-up contributions.
Automatic Enrollment in Retirement Plans
Starting in 2025, most employers will be required to automatically enroll employees in their retirement plans, withholding a minimum of 3% of their income in the first year and increasing withholding by 1% each year until it reaches 10%. Employees will have to opt out of automatic enrollment if they do not wish to participate.
The hope is that by increasing automatic enrollment, the act will increase the number of people saving for retirement and the amount that they save.
Certain employers are exempt from this requirement, including businesses with 10 or fewer employees and businesses that are less than three years old.
Changes to Employer Matching
Employers will now have the option to match their employees’ student loan payments with equal (or lesser) contributions to those employees’ retirement plans, even if the employees aren’t yet contributing to those plans themselves.
Employers will now also have the option to match contributions to Roth accounts.
Rollover for 529 Accounts
Secure 2.0 allows for up to $35,000 of extra money from 529s (college savings accounts) to be rolled into a Roth IRA without penalty. This provision eliminates the concern of over-contributing to a 529 and incurring the hefty 10% penalty if the money isn’t used for qualified educational expenses.
What to Watch for as a Tax Preparer
While the Secure 2.0 Act will certainly impact your clients’ retirement savings plans, many parts of it won’t necessarily impact their tax returns. However, a few key portions of the bill don’t make headlines but do impact taxes. Here are some that could affect the returns of small businesses and individual taxpayers.
The Saver’s Credit is now a “Saver’s Match”
The Saver’s Credit is a tax credit for low-income individuals who contribute to retirement savings plans. Starting in 2027, the credit will instead become a match contribution to the individual’s retirement account. The matched amount will be up to 50% of the first $2,000 contributed, for a maximum of $1,000.
Tax Credits for Small Businesses
Small businesses with 50 or fewer employees could qualify for a tax credit if they start retirement plans. In 2023, small businesses can receive a credit that is equal to 100% of administrative costs related to starting the plan, as well as a credit for up to $1,000 per employee for employer retirement contributions. To qualify for this credit, contributions must be made for employees whose wages are under $100,000. After the first two years since the creation of the retirement plan, the contribution-matching credit will decrease by 25% per year.
If an employer has 51-100 employees, they can still qualify for a smaller credit outlined in the original Secure Act. The credit can be used toward 50% of administrative costs related to setting up a retirement plan up to $5,000.
To help your clients claim the credit, you’ll need to file IRS Form 8881.
Changes to QCDs
The Secure 2.0 Act provides more ways for retired individuals to use their retirement distributions toward qualified charitable distributions (QCDs). Retired taxpayers can now direct up to $50,000 to fund certain charitable trusts and annuities.
These include: Charitable Remainder Unit Trust (CRUT), Charitable Remainder Annuity Trust (CRAT) or a Charitable Gift Annuity (CGA). Note that they may claim this type of QCD only once.
Additionally, the current maximum of $100,000 in QCDs for individuals over 70.5 years old will be indexed to increase with inflation. Because QCDs decrease taxable income, anyone retired taxpayer who is itemizing deductions could potentially benefit from these changes. You can help your clients determine if making QCDs could improve their tax situation.
For more ways to help your clients manage their taxes and finances through retirement, refer to our guide, Helping Your Clients Prepare for Retirement.