This week, we will wrap up our exercise in unpacking the components of the SECURE Act 2.0 by looking at some incentives for small business owners and college savers. Let’s start with college savings and loan payoffs.
Student Loan Repayment
A few years ago, the IRS approved a plan that allowed employer contributions to be made to a 401(k) plan for employees who were repaying their student loans. Beginning in 2024 with SECURE 2.0, an employee’s student loan debt repayment can be treated the same way their salary deferral to a retirement plan is treated. This is an option that an employer can add to their retirement savings plan. The advantage of this provision is to increase retirement savings for employees by allowing employers to match contributions for compensation amounts employees use to pay down debt rather than defer into the employer’s retirement savings plan. This is a nice way to get a tax break on paying down student loan debt.
Convert College Savings to Roth IRA
Now, what if you haven’t used all your college savings to pay for college? Many individuals contribute to a 529 plan to save for education costs. Sometimes, these accounts hold funds that are no longer needed for education. SECURE 2.0 creates a new option for continuing to grow these funds in a tax-exempt vehicle. In 2024, owners of certain 529 plan accounts may transfer these savings into a Roth IRA. This option applies to a 529 plan account that has been in effect for at least 15 years, and the amount transferred cannot be larger than the total of all contributions made to the 529 plan during the most recent five years. Finally, the amount transferred during a year is limited to the annual amount allowed as a Roth IRA contribution, and all transfers are limited to a maximum of $35,000.
So, if you have a 529 plan, you will want to monitor the timing of contributions and the need for education expenses to be paid from the plan to maximize the opportunity of converting amounts to Roth accounts.
Before we close the SECURE Act topic, let’s look at a few of the incentives included for small business owners.
For employers with no retirement plan, SECURE 2.0 provides for starter 401(k) or 403(b) plans. These starter plans limit salary deferrals to a maximum of $6,000 plus catch-up contributions for those over age 50. Automatic enrollment of employees is required, but an employee may elect out. These starter plans simplify administration by deeming that the discrimination tests are satisfied, although notice of the plan to employees is required.
For employers with 50 or fewer qualifying employees, SECURE 2.0 provides an increased tax credit for starting a plan. For plans started in 2023, the credit is increased to 100% of administrative costs and ranges from $500 to $5,000. In addition, there is an additional 100% credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first year of the plan. This credit decreases by 25% each of the following three years.
Employers with 51-100 qualifying employees can qualify for a similar, but lesser, credit for employer contributions. There are also additional credits for contributions for military spouses who are participating in certain employer plans.
Congress is encouraging employers to fund retirement savings for employees to “kick start” retirement savings, anticipating that tax-deferred compounding of earnings will encourage both employers and employees to continue making contributions.
Solo 401(k) Plan
SECURE 2.0 provides parity for solo 401(k) plans with IRAs. A sole proprietor who is the only employee of the business can make a deferral election for compensation contributions into their 401(k) plan up until the due date (without extensions) for the tax year’s income tax return, but only for the first year of a plan. This extended time can encourage the adoption of a plan and provides more information about the earnings of the business while the sole proprietor’s tax return (including the business’s income) is being prepared. This applies for plan years beginning after December 29, 2022.
I hope this information has helped to inform you of the new options and opportunities you have in saving for retirement and saving on your taxes, thanks to SECURE Act 2.0. I know this is complicated stuff, and my hope is that in delivering it in small, bite-sized pieces and a more understandable format, you will have a greater ability to make sense of it all. It won’t be as simple as pulling the red or blue wire, but I hope it’s a bit more digestible. As always, I encourage you to reach out with any questions!
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
U.S. Congress. "S.1770 - Retirement Security and Savings Act of 2021: Summary."
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