April 17, 2023

The 8 Biggest Changes in SECURE Act 2.0

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Three years after Congress passed the original SECURE Act, the SECURE Act 2.0 was signed into law in late December 2022. The legislation builds on its predecessor with a broad array of dozens of provisions intended to bolster the retirement system—and Americans’ preparedness for retirement. The expectation is that the changes will result in increased savings in workplace retirement plans and IRAs, make it easier to establish a new workplace retirement plan, as well as offering more flexibility and convenience to those saving for retirement.

Here are 8 of the biggest changes seen in SECURE 2.0:

1. Significant changes to Required Minimum Distributions.

  • Starting January 1, 2023, the age at which owners of traditional IRAs and workplace retirement plans must start taking RMDs increased from 72 to 73. This gives individuals an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts.
  • The Secure Act 2.0 also pushes the age at which RMDs must start from 73 to 75 starting in 2033.  Another way of thinking about this is that for those people born in 1960 and beyond, your RMDs must start at 75.
  • Additionally, the 50% penalty for failing to take your RMD has been cut in half to 25% beginning in 2023. Furthermore, if an RMD shortfall is corrected in the “Correction Window,” the penalty is further reduced to 10%.
  • Beginning in 2024, the law also eliminates RMDs for Roth accounts in employer retirement plans, bringing those plans into line with the current RMD treatment for Roth IRAs.

2. An increase in catch-up contributions.

  • Starting January 1, 2025, the law allows individuals ages 60 through 63 years old to make increased catch-up contributions to certain workplace retirement plans, such as a 401(k) and 403(b).  Workers in that age bracket will be able to contribute up to the greater of $10,000 or 150% of the regular catch-up contribution amount, indexed for inflation.
  • In addition, beginning in 2024, all catch-up contribution limits – including those for IRAs – will be indexed to inflation.
  • One caveat is that also starting in 2024, for those making more than $145,000, all catch-up contributions will need to be made to a Roth account, funded with after-tax dollars.

3. Employer matching for Roth accounts.

  • Employees can now elect to receive matching contributions to their qualified retirement plans – such as a 401(k), 403(b), or 457(b) – from their employer on a pre- or after-tax basis.  This means that you now have the option of directing those matching contributions into a Roth account, whereas in the past only pre-tax matching contributions were allowed.
  • One thing to note is that these after-tax contributions must be fully 100% vested and would be included in the employee’s income in the year of contribution.
  • Given how late in 2022 the law was passed, it may take time for some plans to adopt these changes.

4. Automatic enrollment in workplace retirement plans.

  • Beginning in 2025, the new law requires businesses adopting new qualified retirement plans to automatically enroll eligible employees, with a contribution rate of at least 3%.
  • The contribution rate will then automatically increase by at least 1% every year, up to at least 10% but not to exceed 15%.

5. Save for retirement while repaying student loans

  • With the introduction of the Secure 2.0 Act, starting in 2024 an employer can make a matching contribution to an employee’s qualified retirement plan account based on their student loan repayments. The hope is that these matching contributions could help employees who are focused on paying down their student loans to start saving sooner for retirement.

6. Option to roll your 529 into a Roth IRA

  • Effective in 2024, 529 plan funds can be directly rolled over to a Roth IRA.
  • Importantly, the 529 plan must have been in effect for a minimum of 15 years, and the Roth IRA needs to be in the name of the intended beneficiary of the 529 plan.
  • In addition, any contributions to the 529 within the last 5 years and any attributable earnings are ineligible to be transferred. 
  • There is a lifetime rollover limit of $35,000, and the amount rolled over in any given year must be within annual IRA contribution limits.

7. Emergency Savings Accounts. 

  • Secure 2.0 creates a new Emergency Savings Account, to be linked to your defined contribution retirement plans – such as a 401(k), 403(b) etc – beginning in 2024.
  • Contributions would be made after-tax to a designated Roth account
  • Contributions will be capped at $2,500 annually indexed for inflation
  • Participants are allowed to take at least one withdrawal per month, and the first 4 withdrawals in a year would be penalty-free.
  • Depending on the employer, contributions may be eligible for an employer match of up to 3%.

8. Emergency withdrawal exception

  • An exception from the 10% early distribution penalty has been created allowing retirement investors to withdraw up to $1,000 from their retirement accounts when experiencing “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses”.  These distributions are limited to no more than once per calendar year.