401(k) and IRA changes, financial meeting with young couple
401(k) and IRA changes, financial meeting with young couple

401(k) and IRA changes after a recent retirement law overhaul

Recent 401(k) and IRA changes could have a significant impact on your personal finances and retirement savings, and it’s worth reassessing your savings plan. In December of 2022, President Biden signed the Secure 2.0 Act of 2022, a bipartisan retirement savings law that includes numerous retirement policy changes that will go into effect over the next decade.

The Act forms part of the Secure 2.0 workplace savings plans, under which retirement savings accounts will undergo numerous changes, retirement tax incentives will be reshaped, and retirement account contributions will be rewarded. This article summarizes some of the critical changes you need to be aware of for your retirement planning, regardless of your age.

Incentives for employers to offer retirement plans

  • Small employers that don’t offer retirement plans can take advantage of the small employer retirement plan startup tax credit. Depending on the number of eligible employees, the credit covers 100% of the initial costs (up to $5,000) for three years. 
  • An additional credit is available for five years to small employers that match employee contributions.

What about solo 401(k)s? 

Under the new law, self-employed individuals who want to establish an individual or solo 401(k) have until they file their tax return the following year to open and fund the account (as opposed to having to set it up by December 31).

New rules on taking money out and getting lifetime payouts

  • Starting in 2023, the Required Minimum Distributions (RMDs) age has gone from 72 to 73; and will be raised again to 75 on January 1, 2033. 
  • As outlined in Notice 2024-35, the IRS has extended the transition relief for RMDs in connection with changes brought by the SECURE 2.0 Act of 2022. This extension affects plan administrators, payors, participants, IRA owners, and beneficiaries. Consequently, IRA owners turning 72 in 2024 will have a required beginning date of 4/1/26 instead of 4/1/25.
  • The penalty for missed RMDs has decreased from 50% to 25%, or 10% if the RMD is corrected within 2 years, provided the RMD is corrected in a timely manner. 
  • Withdrawing money from 401(k)s or other pre-tax retirement accounts before age 59 ½ historically incurred a 10% penalty. The new legislation includes new exceptions and enhances previous ones, including allowing anyone with a personal or family emergency to withdraw up to $1,000 penalty-free, starting in 2024. 

New rules to encourage savings

  • Workers will be enrolled into newly created 401(k) and 403(b) plans in 2025 automatically, with some exceptions for small businesses. The savings rate will begin at between 3-10% of their pay scale, increasing by 1% each year until it reaches 10-15%. 
  • 401(k) plans now include rainy-day emergency savings accounts. Employers can automatically enroll employees who make up to $150,000 for 2023. Employees can save up to $2,500 and benefit from tax and penalty-free withdrawals. 
  • From 2027, the government will contribute $1,000 each year to eligible retirement accounts to encourage low- to moderate-income workers to save for retirement. 
  • Subject to income limits and phase-outs, the Secure 2.0 Act will replace the nonrefundable Saver’s Credit. A federal matching contribution will be deposited directly into your IRA or retirement plans.
  • Employers can now hand out a small gift card or cash payment to encourage employees to sign up for and regularly contribute to a 401(k)-type retirement plan. 
  • Employers can now offer Roth matching contributions into an employee’s 401(k) account instead of just accounts set up on a pretax basis. 

READ MORE: IRA to Roth conversion: Should you change your retirement plan this year? 

Increase in retirement plan contributions

Retirement savings vehicles, such as IRAs and 401(k) plans got inflation-adjusted contribution limits for the first time in 2023. Click here for the latest retirement contribution limits.

Secure 2.0 includes several other provisions to increase contribution limits in the coming years, for example:

  • Starting in 2025, those aged 60, 61, 62, or 63 will be eligible for a larger catch-up contribution. 
  • Starting in 2024, IRA catch-up contributions will be indexed to inflation, raising the existing $1,000 cap for the first time in over a decade. 
  • A new, higher contribution cap linking 401(k) catch-up limits to inflation will apply to people between 60 and 63 beginning in 2025.

Lifetime income provisions

  • With the new IRA Charitable Rollover, IRA owners who are 70 ½ or older may take a one-time withdrawal of up to $50,000 to fund a charitable remainder trust or charitable gift annuity. From a tax perspective, the withdrawal doesn’t count as income and can count toward any RMD amount for the year. 
  • The new retirement legislation enables more people to take advantage of deferred annuities in the form of qualified longevity annuity contracts (QLACs). 401(k) participants or IRA owners looking for guaranteed income in retirement could use up to $200,000 from their account to buy the annuity that would make guaranteed payments for life, an increase on the existing limitation of $145,000 or 25% of the retirement account balance. 

READ MORE: How secure is your retirement plan? 

Do you still have questions about Secure 2.0? Check out our FAQs.

Let the professionals run your retirement plan 

Retirement saving should always be a top priority—you can’t borrow money to pay for retirement, so it’s essential to plan for it. But with retirement plan rules changing frequently, it’s not always easy to keep track and optimize your plan accordingly. Please reach out to schedule a financial planning meeting with one of our professionals so that we can help you maximize your retirement benefits.

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