Retirement saving has become a significant focus both in the United States and Nevada, as governments, employers, and individuals grapple with the challenges of ensuring financial security for aging populations. The importance of retirement saving is underscored by several factors, including longer life expectancies, the shift away from traditional pension plans to defined contribution plans (401(k), IRA), and concerns about the adequacy of social security systems to support retirees. New Federal and Nevada State laws were recently enacted to address these issues. This article provides an overview of these laws, the related income tax effects and compliance with the Nevada Saves program.
The SECURE 2.0 Act of 2022 is a piece of federal legislation passed as part of the broader Consolidated Appropriations Act of 2023. It builds on the foundation of the original SECURE Act of 2019 and introduces significant reforms aimed at enhancing retirement savings opportunities for Americans.
Enhanced Tax Credits for Small Business Retirement Plans
The SECURE 2.0 Act offers increased tax incentives for small businesses to establish retirement plans. Starting in 2024, small businesses can elect two tax credits to defray the costs of setting up and administering qualified retirement plans. Specifically, the tax credit for startup costs has been elevated to cover 100% of the expenses for businesses with up to 50 employees, up to certain limits, significantly reducing the financial barrier to offering retirement benefits. The specific limits of this tax credit under the SECURE 2.0 Act are as follows:
The credit equals 100% of the eligible startup costs for businesses with up to 50 employees. The maximum annual credit amount is $5,000, calculated as the greater of $500 or the lesser of $250 per non-highly compensated employee eligible to participate in the plan or $5,000. This credit is available for the first three years of the
plan’s existence, potentially totaling up to $15,000 in tax credits.
Additionally, the Act introduces a new small employer automatic enrollment credit of $500 per year for up to three years for businesses that include automatic enrollment in their new existing retirement plans.
Adjustments to Contributions and Benefit Limits
In 2024, the IRS has updated the contribution limits for various retirement accounts to reflect cost-of-living adjustments, enabling individuals to allocate more funds towards their retirement savings. For employees participating in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, the contribution limit has been increased to $23,000, up from $22,500 in 2023. The annual contribution limit for Individual Retirement Accounts (IRA) has also seen a rise, moving to $7,000 from the previous $6,500.
Individuals aged 50 and over have the advantage of making catch-up contributions to accelerate their retirement savings. The catch-up contribution limit for IRAs remains at $1,000, allowing a total contribution of $8,000 for those eligible. For 401(k), 403(b), most 457 plans, and the Thrift Savings Plan, the catch-up limit stays at $7,500, permitting a total contribution of up to $30,500 for participants 50 and older.
For self-employed individuals and small business owners utilizing SEP IRAs, the contribution limit for 2024 has been adjusted to allow contributions of up to 25% of compensation or $66,000, whichever is less. This adjustment ensures that SEP IRA participants can also benefit from enhanced saving opportunities in line with inflation and cost-of-living changes.
Delayed RMDs: New timeline for retirement savings
One of the most significant changes under the SECURE 2.0 Act is the further delay in the age at which required minimum distributions (RMDs) from retirement accounts must begin. This adjustment allows more time for savings to grow tax-deferred.
Previously, the age to begin RMDs was set at 72, following an increase from 70½ years by the original SECURE Act of 2019. The SECURE 2.0 Act, building on this, further delays the start age for RMDs. Starting in 2023, the age at which RMDs must begin is increased to 73 years. Moreover, the Act outlines a future increase, setting the RMD start age at 75 years beginning in 2033.
Expanding Access with Emergency Savings and Roth Options
The SECURE 2.0 Act introduces several enhancements to retirement savings plans, among which the expansion of Roth options within employer-sponsored plans stands out as a significant development. This provision not only encourages the creation of emergency savings accounts linked to retirement plans but also broadens the availability and appeal of Roth accounts in the workplace. Let’s take a closer look at these Roth options and the implications of removing income limitations on Roth 401(k) contributions.
Under the SECURE 2.0 Act, employers can now offer more Roth options within their retirement plans, including 401(k) and 403(b) plans. This expansion means that employees have the opportunity to contribute to Roth accounts where their contributions are made on an after-tax basis. The advantage of Roth contributions lies in their tax treatment: while contributions do not reduce current taxable income, the withdrawals, including earnings, are tax-free in retirement, provided certain conditions are met. This can be particularly beneficial for individuals who expect to be in a higher tax bracket in retirement or who value tax-free income in their retirement years.
Another innovative feature introduced by the SECURE 2.0 Act is the ability for employers to offer emergency savings accounts linked to their retirement plans. These accounts are designed to help employees save for short-term needs without tapping into their long-term retirement savings. Contributions to these emergency accounts can be made on a Roth (after-tax) basis, providing tax-free growth and withdrawals for emergencies, which enhances the financial resilience of employees.
One of the most notable changes under the SECURE 2.0 Act is the removal of income limitations for contributions to Roth accounts within employer-sponsored plans, such as Roth 401(k)s. Previously, high-income earners were restricted from contributing to Roth IRAs due to income limits. However, the SECURE 2.0 Act allows individuals, regardless of their income level, to make Roth contributions to their 401(k) plans. This change democratizes access to Roth accounts, enabling more employees to take advantage of the tax-free growth and withdrawals offered by Roth contributions. It’s a significant shift that provides all employees, including high earners, with a powerful tool for tax planning and retirement savings.
As the tax landscape evolves with the SECURE 2.0 Act, business owners must stay informed and proactive in their retirement planning strategies. By leveraging the increased tax credits, adjusting to new contribution limits, and embracing the expanded opportunities for employee participation, businesses can not only comply with the new regulations but also enhance their benefits offerings, contributing to the financial well-being of both the business and its employees.
Nevada Saves
The Nevada Saves program is a forward-thinking initiative by the state of Nevada, aimed squarely at addressing the challenge of saving enough for retirement. This program is particularly focused on employees of small businesses that aren’t provided with employer-sponsored retirement plans, a common scenario that leaves a significant portion of the workforce at a disadvantage when it comes to retirement savings
Set to take effect on July 1, 2025, the program mandates that private-sector businesses with more than five employees participate if they do not currently offer a qualified retirement plan. This requirement underscores the state’s commitment to expanding retirement savings opportunities and ensuring that a larger segment of the workforce can look forward to a financially secure retirement.
A key feature of Nevada Saves is its automatic enrollment policy. Employees who meet the age and employment criteria will be automatically enrolled, though they have the option to opt out, providing flexibility and personal choice in retirement planning.
For business owners, navigating the new requirements will be crucial. The program introduces phased registration deadlines based on company size, starting with the largest employers in 2025 and extending to those with fewer than 100 employees by January 1, 2027. This staggered approach is designed to give businesses sufficient time to prepare for compliance.
Understanding and preparing for the Nevada Saves program is more than a regulatory requirement for business owners; it’s an opportunity to contribute to the financial well-being of their employees. As the implementation date draws closer, staying informed and seeking guidance from financial advisors or accountants will be key to a smooth transition. This proactive engagement will not only ensure compliance but also support the broader goal of enhancing retirement security for all Nevada workers.
Donovan Thiessen, CPA is the founder and owner of The Accountant, LLC. Our mission is to help business owners make better decisions by providing timely and accurate financial and tax analysis. You may reach Donovan at [email protected], www.theaccountant.cpa, and 702.389.2727.
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