New Law Ushers in Major Retirement Changes
There’s been buzz about new retirement plan provisions for weeks, and now they’re final, bringing about changes to various federal rules. These changes add benefits and flexibility to current and future retirees. The Secure 2.0 Act of 2022, part of the Consolidated Appropriations Act of 2023, includes the following modifications, some of which are immediate, and others that will take effect in the future.
Ability to Hold on to Assets Longer
People who contributed to plans previously had to start taking money from their plans when they reached a certain age. The idea behind this rule was to help ensure funds were used during the retiree’s lifetime rather than simply invested for their heirs. The Act changes the current age of 72 to 73 starting Jan. 1, 2023, and to 75 starting in 2033.
This may be the most significant change. According to the official government summary, a significant problem in retirement savings is that many employees don’t participate, even when they have a plan at work. “But automatic enrollment in 401(k) plans — providing for people to participate in the plan unless they take the initiative to opt out — significantly increases participation.” The Act requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible. In short, employees have to complete forms to opt out of the plan instead of to opt in. The initial automatic enrollment amount is at least 3%, but not more than 10%.
Beginning in 2025, for new retirement plans started after December 29, 2022, contribution percentages must automatically increase by one percent on the first day of each plan year following completion of a year of service until the contribution is at least 10 percent, but no more than 15 percent of eligible wages. Exceptions apply for governmental and church plans, businesses with 10 or fewer employees, and employers that have been in business for less than three years. This provision is effective for plan years beginning after Dec. 31, 2024.
Stronger catch-up contribution provisions.
Previously, employees who had attained age 50 were permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2021 was $6,500 (or $3,000 for SIMPLE plans). The Act increases these limits to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for individuals who have attained age 60, 61, 62 or 63. The increased amounts are indexed for inflation after 2025. This provision is effective for taxable years beginning after Dec. 31, 2024.
This is just a summary of a complex series of provisions. The Act contains more changes, and the timing can get confusing. The one sure thing is that whether you’re an employee or an employer, there’s a good chance you will be affected by one or more of the new provisions.
For any questions or clarifications, please reach out to your LMC professional.
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