Recent Omnibus Bill Affects Retirement Savings
While most of Americans were celebrating year-end holidays this past December, a tax and spending package was passed and signed into law. Such last-minute legislation has seemingly become a holiday tradition of Congress, and this past season was no exception with the $1.7 trillion omnibus appropriations bill becoming law. So late in the holiday season was this passed that President Biden signed it into law from his vacation destination in St. Croix.
Surprising to many was the absence this time of many expected major tax provisions. Among the expected provisions that failed to make the final cut was an expansion of the Child Tax Credit. Also not included was the extension of many expiring tax provisions affecting businesses, including the very popular 100% bonus expensing for business fixed assets, which has decreased to 80% for assets placed in service after 2022.
Equally surprising perhaps is the fact that the bill contained a retirement package, the SECURE Act 2.0. The name pays homage to the original SECURE Act passed and signed into law during the Trump presidency. SECURE Act 2.0, which enjoyed a modicum of bipartisan support, has the stated objectives of simplifying the savings process and affording greater flexibility for individuals nearing retirement or who have already retired.
While I have not yet read all of the text of SECURE 2.0 (I was celebrating the holidays myself, after all, so avoided the temptation), it is my understanding there are some 92 retirement-related provisions. Some of the more prominent and broadly applicable of the provisions include:
- Mandatory Beginning Date for Required Minimum Distributions. The original SECURE Act increased the age for taking retirement plan required minimum distributions (RMD) from 70.5 to 72. SECURE 2.0 now increases the required RMD age to 73 now and then to 75 in 2033.
- Reduction in 50% Excise Tax on for Failure to Take RMD. Speaking of rules related to the RMD, this provision reduces the excise tax penalty for failure to take the RMD from 50% to 25%. Further, if a failure is corrected in a timely manner (generally within two years), the excise tax is reduced from 25% to 10%.
- Bigger "catch-up" contributions for older retirement savers: Under old law, you could put an extra $6,500 annually in your 401(k) once you reach age 50 (for IRAs the catch-up is $1,000). SECURE 2.0 increases the 401(k) limit to $10,000 (or 50% more than the regular catch-up amount) starting in 2025 for savers ages 60 to 63. Catch-up amounts also will be indexed for inflation, including those for IRAs. SECURE 2.0 Act also requires all catch-up contributions for those with compensation over $145,000 (to be indexed for inflation) during the previous year to be deposited into a Roth account.
- Automatic Retirement Plan Enrollment. Plans will be required to automatically enroll participants in the retirement plan upon becoming eligible, although the employee may opt-out of coverage if they so choose. The initial automatic enrollment amount is between 3% and 10%. Small businesses with 10 or fewer employees, new businesses, church plans and governmental plans are excepted from these expanded rules.
- New Saver's Match. One interesting provision repeals the nonrefundable credit for lower income individuals who make contributions to various retirement plans and replaces it with a new "match" feature. So, instead of a tax credit received on a tax return, eligible taxpayers will receive a federal matching contribution that must go into the taxpayer's IRA or retirement plan. The match is 50% of IRA or retirement plan contributions up to $2,000 per individual.
- Change in Credit for Small Employer Pension Plan Startup Costs. This provision changes the startup credit from 50 to 100% for employers with up to 50 employees. An additional credit is also provided (except for defined benefit plans), the amount of which will generally be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. The applicable percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year – and no credit for tax years thereafter.
The Omnibus bill was over 4,000 pages long, so no doubt there are more nuggets to be uncovered in the future. The included SECURE Act 2.0 make major changes generally favorable to taxpayers and encourages you to take saving for your retirement years into your own hands.