Increased contribution limits and higher catch-up contributions are only two additional benefits for people planning for retirement. The Secure 2.0 Act, signed into law on December 29, 2022, has many different components affecting a variety of qualified retirement accounts. Two main goals were to increase accessibility to and expand savings for retirement plans.
Retirement Plan Auto Enrollment Expansion
Under the Act, eligible employees are provided automatic enrollment in all Section 401(k) and 403(b) plans that must also meet the following additional requirements:
- Withdrawals must be permitted within 90 days after the date of the first elective contribution to the plan.
- Automatic contributions, starting from 3% to 10% of the minimum contribution percentage within the participant’s initial year of plan participation, must be provided for. An automatic contribution increase of at least 1% to 10%, but not to exceed 15%, is required of the plan after the first year of participation.
- Contributed amounts that are deemed part of the automatic contribution must be invested according to Department of Labor regulations, should the participant not make an investment decision.
It’s important to note that plans established prior to the Act’s enactment date are considered exempt from this provision, as are other retirement plans such as certain governmental, church, SIMPLE 401(k), and plans with 10 or fewer employees.
All the aforementioned provisions apply to plans years beginning after December 31, 2024.
Increased Contributions
While not an effect of the Act, owners of individual retirement accounts and participants in 401(k) and 403(b) plans, 50 and older, will benefit from higher contribution limits. This is a tremendous benefit for older workers who might be behind on their goals for retirement saving. For 2023, contribution amounts increased to $22,500, up from $20,500 in 2022.
The Act does, however, create better catch-up contribution opportunities, such as the following.
Higher Catch-Up Limits
Participants aged 50 and older with 401(k) and 403(b) plans may contribute an additional $7,500 per year.
The Act also provides a new catch-up contribution category, set to commence in 2025, for those in the 60 to 63 age bracket. This new catch-up limit will:
- be the greater of $10,000 or 150% of the standard catch-up limit; and
- increase regularly with inflation
Catch-Up Limits for IRAs Indexed to Inflation
IRA owners, 50 or older, can now make a $1,000 additional catch-up contribution deposit, on top of the standard contribution limit of $6,500. The Act creates a more progressive approach to increasing IRA catch-up contributions limits. However, due to the increase in cost of living, such adjustments will round down to the nearest $100.
Working with a professional financial advisor on retirement planning projections and needs is a great way to determine when to retire, the best saving and contribution practices, and how to stretch money to meet financial goals over time.
Author, Dyan Cole
Director of Operations
Spiegel Accountancy
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.