Regulatory & Compliance | 09.04.24

SECURE Act 2.0: Impacts on IRA Contributions, Small Businesses and More

by: Rich Blake

When clients drop by the branch post Labor Day, you’ll have no shortage of conversation starters: How was your summer? Kids ready for school? Up to speed on Secure Act 2.0?

It was back in the pre-pandemic days of 2019 that Congress originally passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The measure was deemed by lawmakers as a decent start yet inadequately comprehensive. And so “Secure Act 1.0” got an ambitious upgrade at the end of 2022. This new version resulted in dozens of fresh provisions collectively aimed at boosting American retirement incomes. A slew of them are relevant for tax year 2024 or are soon to kick in at the start of 2025, warranting extra attention as the year winds down.

Here is an overview of some of the most impactful elements of the rules package that bear emphasis when advisors sit down with clients, whether heads of households, small business owners or both.

Catch Up if You Can

Contribution limits to 401(k) plans tend to be adjusted by the IRS from year to year. (This year, workers can contribute up to $23,000 to their plans, up from $22,500 in 2023). Employees who are age 50 or over are eligible for an additional "catch-up” contribution of $7,500.

To allow workers to bolster their nest eggs during peak earning years, Congress (via Secure Act 2.0) has increased catch-up limits for plan participants between the ages of 60 and 63. Beginning with the 2025 plan year, these cohorts will be able to make catch-up contributions of $10,000 or 150% of the 2024 annual limit (if it’s a higher amount).

Concurrently, the IRA catch-up contribution limit for individuals 50 or older will be adjusted annually based on inflation. Presently, the IRA contribution limit is $6,500. Workers above the age of 50 can make an additional $1,000 catch-up contribution.

Secure Act 2.0 ushers in a new approach for gradually increasing IRA catch-up contributions as costs of living rise, Forbes Advisor explained.

Hiking catch-up contributions is a clear acknowledgment that more people continue to work throughout the autumn of their years, and even then may find themselves falling short of their goals. A Federal Reserve survey found that only 40% of workers felt that they were on track to have enough money to comfortably leave the workforce.

An RMD Remedy

A required minimum distribution (RMD) forces investors to take money out of pre-tax vehicles and pay income tax on the distributions. Under Secure Act 2.0, individuals will not be required to take an RMD until age 73, up from 72; in a decade from now, the age will rise again to 75.

According to Forbes Advisor, "optimizing your RMD strategy is one of the toughest parts of retirement planning."

While Secure Act 2.0 offers investors more flexibility for taking RMDs, "it’s best to take a broad view of your particular situation,” Forbes Advisor said. “Because the longer you delay distributions, the bigger they’ll need to be, which will increase your tax bill."

Preaching About Converts

Here's a change to take notes on: investors who created 529 education savings plans for their children can now convert up to $35,000 saved in that plan to a Roth IRA for beneficiaries with no penalties, provided the 529 account was open for at least 15 years.

Whether the child ended up not going to college, attended a state school or received a full scholarship, that spare, untapped money previously incurred a penalty upon withdrawal. Additionally, 529 rollovers are subject to Roth IRA annual contribution limits.

Business Owners Impacted

Some qualified small businesses that offer retirement plans will have access to increased financial support in the form of tax credits. Tax credits for new plans doubled to a maximum $15,000. For the first three years, businesses (with 50 employees or less) can claim 100% of their plan start-up costs (up from 50%) up to $5,000 per year. Businesses can collect up to $500 annually for the first three years of opting for auto-enroll in their plan. 

Human Interest, a 401(k) provider, explained if the business is part of an existing multi-employer plan, it may qualify for start-up tax credits (depending on what year the business joined).

Earlier this year, Cerulli Associates' team of retirement industry analysts released some research suggesting that defined contribution plan sponsors are keen on a few of rule changes in particular. Cerulli surveyed their universe of plan sponsors about optional Secure 2.0 provisions and found that the highest amount of interest (28%) was for a provision that would allow plans to offer small financial incentives to encourage employee participation in the plan and also found nearly equal interest (27%) in a provision allowing for a plan to match employee retirement contributions on a Roth basis.

"New SECURE 2.0 provisions may mitigate the challenges 401(k) plan sponsors face in engaging retirement plan participants in the saving and investing process," Cerulli’s team said.

Enthusiasm for financial incentives to encourage employee participation in the plan suggests that plan sponsors appreciate newly conceived ways to incentivize plan engagement, "a perennial challenge for plan sponsors," Cerulli added.

The IRS recently pointed out that if employers do elect to offer small financial incentives to employees (who choose to participate in these retirement savings arrangements), then it's considered part of the employee's income. Additionally, unless there's a specific exemption, it is also subject to regular tax withholding.

There’s also a change to SIMPLE IRA plans. These vehicles allow employees and employers to contribute to traditional IRAs set up for employees. It allows employers to make a de-facto profit sharing contribution and can also now allow for additional employee contributions.

As one advisor told us, referring to the breadth and depth of what it entails all told, Secure 2.0 is “a monster piece of legislation.” But in terms of closing the gap on alarming retirement savings shortfalls, it indeed could be an absolute beast.