The Setting Every Community Up for Retirement Enhancement Act of 2022, or SECURE Act 2.0, is a law that aimed to increase retirement savings participation in the United States. It was signed into law on December 29, 2022, and made many changes to retirement plans.
Those changes include…
Expansion To Automatic Enrollment
SECURE 2.0 Act requires employers who establish a new 401(k) or 403(b) plan (after the date the law is enacted) to automatically enroll all new employees. They must be enrolled at a rate of at least 3%, which would increase annually until they reach at least 10%. Workers have the option to opt out or choose a lower or higher deferral rate that fits their needs.
More Catch Up Chances
Under this law, savers have more room to play catch up if they’re nearing retirement age. Right now, people who are 50 and older can save an extra $7,500 in catch-up contributions for 2024, in most retirement plans.
But beginning on January 1, 2025, the amount savers ages 60 to 63 will be able to sock away is the greater of $10,000 or 150% of the current catch-up limit. Under the new law, beginning in 2024, these catch up contributions must be made on a Roth basis, unless you earn $145,000 or less.
Raising The RMD Age
SECURE 2.0 Act raised the required minimum distribution (RMD) age, which is when workers must begin taking withdrawals from their retirement account, from 72 to 73. The RMD age will increase to 75 in 2033.
In addition, SECURE 2.0 Act also reduces the tax for failure to take an RMD from 50% to 25%, and potentially even 10% in certain instances, of a missed RMD.
Student Loan Help
Many borrowers choose paying back their debt over saving for retirement. Under this law, they may not have to make a choice. SECURE 2.0 Act allows companies the option to match student loan payments at the same rate as regular elective deferrals and to deposit a matching contribution into the employee’s retirement account.
Emergency Savings Plans
There is now a plan in place to help people who may need extra cash. SECURE 2.0 gives companies the option of offering an emergency savings account as part of their 401(k) program. If provided, employees would be able to access the account at least once a month to cover unforeseen expenses, without incurring any taxes or penalties.
Participants can contribute until the account reaches a balance of $2,500. If the plan provides for matching contributions, these emergency savings contributions would be eligible for a match as well.
Part-Time Worker Benefits
Part-time employees won’t have to wait as long to save under this law. Beginning on January 1, 2025, long-term, part-time workers become eligible to enroll in their employer’s retirement plan after two years instead of the previous three-year requirement. According to current law, a “long-term part-time” employee is anyone who has worked at least 500 hours over three consecutive years.
Small Business Benefits
Existing start-up credits are expanded and a new tax credit helps some small employers offset company contributions.
Let me leave you with this…
Retirement planning for entrepreneurs is a difficult subject. There’s tons on information available, but when trying to learn about your particular planning needs, please take one thing into consideration.
The rules are different for us because we are both the employee and the employer. We shoulder the burden of both sides of the equation.
Let’s use an example to understand the difficulties.
Joanne B. Owner has an S Corp. She takes $50K as a salary and has a 401(K) where her company does a 6% match on her overall salary annually.
All 401(K)’s are written differently, so the numbers on your particular retirement account probably won’t be the same. But let’s say that Joanne can put $10K of her salary into the 401(K) and her company matches with 6% of her W-2 for another $3K.
Please remember that in order for her to get that 6% match, she needed to pay payroll taxes on her salary which were another 15.3%. It’s hard to justify the 6% when it costs you 15.3%.
But many would look at me and say, “Sure, but she didn’t have to pay income tax on the $10K.” This may be true, but its only true in the short term.
It’s important to realize with what most Certified Financial Planners call “Tax Advantaged” money, that you’ll always pay the tax on the money at some point. In this instance, on a 401(K) she’ll pay regular income tax on it when it’s withdrawn.
So she put’s the $10K into her retirement account, doesn’t pay tax on it this year, it grows to $25K, and she begins paying regular income tax on $25K at retirement. Was this a good idea?
Maybe? Maybe not.
If she had paid income tax on the money when earned put that $10K into a regular stock account, when she began withdrawing it she’d only pay Cap Gains tax on $15K. And we all know that Cap Gains is generally less than Regular Tax Rates.
But a CFP would then say to me, “When Joanne retires she won’t need as much money as she does now, so she’ll be in a lower income tax rate to begin with.” My answer to that is normally something like, so what you’re telling me Mr. CFP is that your terrible at what you do.
When I retire I want to spend more money than I do now and I plan on being in a higher tax bracket altogether.
Again, the rules for entrepreneurs are different. If you have questions, please don’t hesitate to contact us.
We’re all going to get through this. Let’s get through it together.
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