In the $1.7 trillion omnibus bill is the Secure Act 2.0. The Secure Act 2.0 is the second round of large—scale retirement reform. There are provision enhancements that were passed in the Secure Act in 2019. This bill will broaden retirement savings among Americans, particularly for lower—income and small businesses.
Maple Capital doesn’t provide specific legal or tax advice, and we advise you to consider these provisions in consultation with your tax professional or attorney.
Provisions that begin in 2023:
Required Minimum Distributions (RMDs) will be required as of age 73. On January 1, 2033, the RMD age will be raised further to 75.
Missed RMD tax penalty reduction: For missed RMDs the tax penalty falls from 50% to 25%.
Student loan payment 401(k) Match: The Secure Act 2.0 allows employees to treat “qualified student loan payments” as employee deferrals, meaning that an employer can make matching contributions when an employee makes qualified student loan payments.. The Secure Act 2.0 does not require employers to make matching contributions, the Act permits the contributions. This applies to 401(k) or 403(b) plans along with SIMPLE IRAs.
Employer Matching—ROTH 401(k): Historically, employer matching contributions would always be considered as a pre-tax contribution into a 401(k). Under Secure Act 2.0, an employee can opt for those matching contributions to go into their Roth 401(k). Of course, the employee will pay be required to pay taxes on this employer contribution.
Small businesses startup cost relief for new 401(k)s: The Secure Act 2.0 increases the startup credit to 100% of administrative costs for employers with up to 50 employees
Qualified Longevity Annuity Contracts (QLAC): QLACs are special deferred income annuities that a client can hold in their IRA. Amounts that are invested in a QLAC aren’t considered part of your IRA for RMD calculation purposes. There were limits and caps as to how much could be placed in a QLAC. It was a $125,000 limit or 25% of your IRA balances, whichever was less. Under Secure 2.0, there are no caps and the limit has increased to $200,000. This means an individual can buy more lifetime income with a QLAC, thus lowering the value used to calculate your annual RMD, and take lower RMDs. This benefit can last as long as to when you reach the age of 85.
Small business tax credits for defined contribution plans that will benefit military spouses: This provision will relax eligibility requirements and establishes 100% immediate vesting for employer contributions.
Provisions beyond the year 2023:
Catch-up contributions increase: For people over 50 years old the historical catch-up contributions allowed into a 401(k) were $6,500. The Secure Act 2.0 increases this amount to $10,000 for people between the age of 60 to 63 years old starting in 2025. The value of these catch-up provisions will be indexed to inflation as well. Additionally, all catch-up contributions will be subject to Roth treatment (i.e., not pretax) except for workers who earn $145,000 or less per year.
Emergency savings inside your 401(k): One provision allows employees to withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the typical 10% tax penalty for early withdrawal if they are under age 59½. Companies can also let workers set up an emergency savings account through automatic payroll deductions, with a cap of $2,500.
Auto—enrollment mandate in 2025: There is a mandate that any new 401(k)s must have employees auto—enroll in their plan with a minimum contribution of3%, but no more than 10%. Some exclusions exist for businesses with less than 10 employees or for newly formed businesses.
529 plan enhancements: This Secure Act 2.0 provision targets excess dollars saved in a 529 plan that was not used for educational purposes. Secure Act 2.0 allows that money to be rolled into a Roth IRA for the beneficiary of the 529 plan. The 529 plan to be rolled over would need to have been opened for at least 15 years before a rollover is allowed and there is a $35,000 limit to the rollover amount.
In 2027 the Secure Act 2.0 replaces “Savers Credit” with “Savers Match” – People with income under set limits who contribute to a qualified retirement account (i.e.— 401(k)) would receive a limited federal “matching” contribution. The amount would be 50% of up to $2,000 in contributions (or $1,000). Income phase—outs would apply.
A database for savings Lost and Found: In the next few years the government is planning a website where people can find left—behind employee pensions and 401(k) plans they may have forgotten about.
Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia.
This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments.
For further information, please contact Steven Killoran at 1-802-229-2838 or at [email protected]. For further information about Maple Capital, including a copy of our informational brochure, please visit our website at www.maplecapital.com.