Secure 2.0 and More Tax and Retirement Changes of 2023

A new year means brand new changes to your retirement plans via legislation and annual updates from government agencies like the IRS and the Social Security Administration. A typical new year is usually filled with enough changes to keep the team at MRPR on our toes, but 2023 is seeing even more changes than usual, mostly stemming from higher-than-normal inflation and the newly written law, nicknamed SECURE 2.0 Act. Here's everything you need to know to make sure your retirement plans stay on track in 2023.

What is SECURE Act 2.0?

The SECURE 2.0 Act is the follow-up and expansion to the Setting Every Community Up for Retirement Enhancement Act of 2019, which changed rules around retirement and long-term savings accounts.

The original SECURE Act, signed into law by President Donald Trump in December 2019, was intended to give Americans a better chance of retiring comfortably by making some key changes:

• Automatic enrollment in employer-provided retirement plans
• Providing larger tax credits for small businesses and making it easier for them to sponsor employee retirement plans
• Allowing long-term, part-time workers to participate in their employer's 401(k)
• Retirement funds can be withdrawn early penalty-free, in the cases of childbirth, student-loan debt, or adoption
• Repealing the maximum age for traditional IRA contributions

While the changes have been mostly positive, they may not have been enough to offset Americans' lackluster retirement savings. According to Bloomberg, $3.4 trillion was lost from retirement accounts in the first half of 2022, due to a tumultuous market reeling from a pandemic, record-high inflation, and rising interest rates. To add insult to injury, half of private sector workers don't have an employer-sponsored retirement plan

Adding to the post-work life fears is the dwindling social security fund. According to some of the Congressional Budget Office's projections, if things remain on their current trajectory, the social security trust funds "will decline to zero in 2033 and the Social Security Administration will no longer be able to pay full benefits when they are due."

Understandably, legislators felt motivated to improve the future of American financial security by introducing more ways to help. On December 22nd, 2022 President Joe Biden signed Securing a Strong Retirement Act of 2021, or better known as SECURE 2.0, into law. The act includes nearly a hundred provisions, but below are some of the key changes.

• Expanding Automatic Enrollment in Retirement Plans. Beginning in 2024, employees will be automatically enrolled in 401(k) or 403(b) plans, beginning at a contribution of 3% in the first year and maxing out at 10%, with a 1% uptick each year, unless the employee elects to opt-out or elects a different percentage. This does not apply to new businesses (younger than 3 years), or small businesses with less than 10 employees.
• Updates to Required Minimum Distribution (RMD). Previously, individuals were required to begin drawing from their retirement accounts by the age of 72 or face an excise penalty of 50%. Now, the age has been increased to 73 until December 29th, 2029, then 74 beginning in 2030, and then 75 in 2033. Also, the penalty will be decreased to 25%, per Sec. 302.
• Qualified Charitable Distributions (QCDs). An amendment to QCDs increases the limit individuals can donate from an IRA to a charity by a dollar amount equal to the cost-of-living adjustment for the taxable year.
• The Deadline to Establish a Retirement Plan for 2022 is extended. The deadline for companies to be able to establish a new retirement plan for the 2022 plan year is extended until the business tax filing deadline including extensions. Also, beginning in 2023, sole proprietors and single-member LLCs can retroactively fund first-year elective deferrals up until their tax filing deadline. Prior to SECURE 2.0, the plan had to be set up during the same year.
• Increased Startup Plan Credit. Small businesses could claim a tax credit of up to $5,000 for three years for the necessary costs of starting a SEP, SIMPLE IRA, or qualified plan like a 401(k). Now, employers with 50 or fewer employees can claim 100%, rather than 50%, though it still remains capped at $5,000. Employers with 100 or more employees may also be eligible for a tax credit to offset employer contributions of $1,000 per employee in the first year, gradually lessening over the next five years.
• Treating Student Loan Payments as Elective Deferrals. For retirement plan years beginning after December 31st, 2023, plan sponsors may make matching contributions for certain qualified student loan payments made by employees for higher education expenses. This will make it easier for employers to provide matching contributions to employees that choose to repay student loans instead of elective deferrals.

Additional Tax Changes for 2023

It's not just Secure 2.0 that is causing changes in taxes for 2023. The IRS adjusts tax brackets annually to account for changes in the cost of living, but this past year's high inflation has caused more significant changes than a typical year.

2023 vs 2022 Tax Brackets

2023

2022

A way to take advantage of the expansion of lower tax brackets is with a Roth conversion. When an individual starts a Roth conversion, which is transferring retirement funds into a Roth IRA, they'll have to pay income tax on the amount transferred, but with the updated tax brackets you may be eligible for a lesser rate. Since Roth IRAs are not taxed when withdrawn, this can be a smart way to get the most bang for your buck on retirement funds.

Contribution limit increases

The IRS also announced that the annual amount individuals can contribute to their 401(k) is increasing from $20,500 to $22,500. For an IRA, the limit is increasing from $6,000 to $6,500.

Social Security Cost-of-Living-Adjustment (COLA)

In October of 2022, the Social Security Administration announced an 8.7% COLA beginning in January 2023. According to CNBC, this is the highest COLA in over 40 years and will mean an increase in benefits from $1,681 in 2022 to $1,827 in 2023. Last year's increase was just 6.2%.

Most folks would like to do a better job of saving for retirement, and if the previous statistics are any indication, most of us could do a better job. It's not just the new year that creates ways for Americans to save more for retirement, but a lifelong commitment to financial responsibility.

For help with any facet of financial responsibility, from retirement and tax planning to wealth management and trust and estate services, the team at MRPR is standing by to help guide you through whatever challenges life throws your way.