2025 Implementation of SECURE Act 2.0 + SS Fairness Act

Kirk Kreikemeier |
Categories
Planning

You may recall from a couple years ago the news stories (and my blog posts in January and February of 2023 and January 2024) about SECURE Act 2.0.  This legislation updated some laws that govern mostly retirement savings accounts but also other types.  Some changes were effective for 2023, others in 2024 while others delayed until 2025 and later.  This blog post will discuss the 2025 features now in effect.  I will also briefly mention features that went in effect in 2023 and 2024 and what is left to come beyond 2025.

Brief summary of key features that were effective for 2023

  • Required Minimum Distribution (RMD) starts at age 73 (extend to 75 in 2033)
  • Reduce penalty for missed RMDs from 50% down to 25%; down to 10% if fixed on a timely basis
  • Increased Qualified Longevity Annuity Contract (QLAC) amount up to $200k; no 25% limit
  • Employer can make matching contributions to Roth if participant wishes (and if plan updated!)
  • Can have Roth option in SIMPLE and SEP plans (but custodians are not ready!)
  • Sole proprietor with new plan can make salary deferral contributions for prior year

Brief summary of key features that were effective for 2024

  • Excess savings in 529 – up to $35,000 - can be used for Roth contributions for beneficiary
    • Main uncertainty – does a change in beneficiary impact 15-year rule (I assume does)
    • 529 open for at least 15 years and can’t use contributions or earnings from last 5 years
    • Recipient must have compensation and subject to annual IRA contribution limit across all IRAs, but NOT restricted by income limit like regular Roth IRA contributions
    • Also note this is a Federal law; some states don’t allow this as “qualified distribution” and state tax benefits will be lost (IL now allow as “qualified” after August ’24 change).
  • No RMDs for Roth 401k
    • RMDs were never required for Roth IRAs; ARE REQUIRED for Beneficiary Roth IRAs
  • IRA catch-up contribution limits indexed to inflation in $100 increments
    • Those age 50+ currently can contribute extra $1,000 to IRAs
    • Unfortunately there is no adjustment for 2024 but at least the meter is running
  • Maximum allowed for Qualified Charitable Distribution (QCD) indexed to inflation
    • $105,000 allowed for 2024; was $100,000 for 2023 and years prior
    • Age 70.5+ (not 73!) to make charitable donation from IRA; counts as RMD but not taxed
  • Surviving spouse can choose decedent’s age for RMDs
    • Benefit if survivor is older – either delay start of RMD or use higher factors => less RMD
  • Roth 401k Emergency Fund
    • Can contribute up to $2,500 in total (highly compensated not eligible)
    • Held in cash-like instruments; plans need to allow; distribution questions remain
  • Additional SIMPLE IRA employer contributions (for 2024 tax year plans, not 2023)
    • Beyond required match, up to lesser of $5,000 or 10% of compensation
  • Employer can match participants’ student loan payments as if was salary deferral
    • Matching and vesting schedule must be same as regular salary deferral

Here are the key features or updates effective for 2025

  • Extra catch-up contribution for those age 60 – 63
    • For 401k, 150% of regular catch-up amount, so $11,250 rather than 7,500
    • For SIMPLE IRA, 150% of catch-up, so $5,250 rather than $3,500
    • If wages above $145k, enjoy pre-tax option for these contributions one more year!
  • Recall maximum Qualified Charitable Distribution (QCD) indexed to inflation
    • $108,000 allowed for 2025; was $105,000 allowed for 2024 and $100,000 years prior
  • Increased Qualified Longevity Annuity Contract (QLAC) amount up to $210k; no 25% limit
  • IRA withdrawal without penalty to cover Long-Term Care insurance premiums starting 12/29/25
    • Limited to lesser of $2,500 or 10% of balance
  • Mandatory Auto Enrollment in 401ks (participant can opt out)
    • Initial rate from 3% - 10%; auto increase 1%/year until 10% - 15%
    • Plans exempt: existing, government, church, under 10 employees, SIMPLE

More excitement from Secure Act 2.0 for 2026 or later

  • 401k catch-up contributions must go to Roth 401k if wages > $145,000
    • Was scheduled for 2024 but implementation complexity delayed to 2026
    • Based on previous year wages of individual from that employer; can avoid if switch jobs
    • If 401k plan doesn’t have Roth 401k option won’t be able to make catch-up… interesting
  • Expand ABLE account eligibility to person disable before age 46, not current 26, starting in 2026
  • ETFs can be used in variable life and variable annuities starting 12/29/2029
  • RMD at age 75 starting in 2033

While not Secure Act 2.0 related, Social Security Fairness Act passed 1/5/2025 removes GOP and WEP

I mentioned this briefly in my last market update blog post as a special topic but it is worth repeating. There were two key provisions in Social Security (SS) that impacted government workers.  The intent was to adjust benefits since many not paying FICA taxes into SS (rather to separate government pension) and adjust spousal benefits if an individual wasn’t accruing enough credits for own SS. Specifically, the two provisions are called:

  • Government Pension Offset (GPO) – reduced spousal and survivor benefits
  • Windfall Elimination Provision (WEP) – reduced benefits base own earnings

While the provisions were included to adjust for discrepancies in base calculation of SS benefits, these necessary adjustments are not fully understood by many and added extra complexity to SS benefit calculations.  Since these adjustment are now gone, I won’t explain further (click here for an overview or click here for a deep dive), but if you haven’t filed for Social Security in the past because thought your public pension was offsetting all of SS benefit, you may want to consider filing for benefits now.  The details of how this law will be implemented and communicated – and adjustments made to benefit amounts – are still being worked out.  There was actuarial justification for these reductions due to lack of contributions and the intent of spousal benefits in SS.  Recall Social Security currently has a severe underfunding problem and this is moving us further away from fixing as there was no funding offset to these increased benefits.  The Congressional Budget Office projects this Act will add $196 billion to deficit over 10 years and bring Social Security shortfall date closer by six months.

Be sure to utilize tax-qualified savings to enhance your retirement savings power.  These latest implementation rules may seem daunting but I encourage their use if appropriate for your circumstances.  Reach out for help to maximize the benefits available.

 

 

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Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional. www.pvwealthmgt.com