by | Jan 11, 2023

Understanding the SECURE Act 2.0

As 2022 came to a close, and while many of us were focused on the holidays, Congress passed new legislation for America’s retirement system. Called the SECURE Act 2.0 (which stands for Setting Every Community Up for Retirement Enhancement), it’s part of the greater Consolidated Appropriations Act 2023, and a follow-up to the original SECURE Act, implemented in 2019 and which made significant changes to the retirement landscape, such as increasing the minimum distribution age to 72 from 70.5, and eliminating the “stretch” IRA.

This new SECURE Act 2.0, passed on December 26, 2022, contains many more provisions than its predecessor. Some are significant and will affect many people, while others have a more limited impact. Some changes take effect right away, and others will be implemented over a period of several years.

You may have read articles or headlines about the SECURE Act and are unsure what to make of it. You may be wondering things like: I was planning on retiring in the next few years. Should I still do that? Should I be doing anything differently this year? Or: I’m still so far away from retirement. Does this even affect me? I’m still working on building my savings and developing a financial plan.

The SECURE Act is overwhelming in scope. But that means there are planning opportunities for everyone. Overall, the goal is to give Americans more flexibility and greater access to their retirement assets, while offering numerous savings incentives. Which changes will affect you and your plan depend largely on how close you are to retirement. Below are some of the more significant changes.

For people who are already retired, or are approaching retirement in the next few years:

1. The Required Minimum Distribution (RMD) age is increasing again.

For many years, the age at which a retiree was required to take distributions from traditional IRAs and retirement plans was 70.5. Then, starting in 2020 (thanks to the first Secure Act) that age was raised to 72. Now it’s been raised again—to 73 beginning January 1, 2023. Ten years from now, on January 1, 2033, it will be raised to 75. In other words, anyone born between 1951 and 1959 has an RMD of 73. Anyone born in 1960 or later has an RMD of 75.

If you’re already taking RMDs, or just turned 72 this past year and are scheduled to take your first one by April 1, 2023, this change doesn’t apply to you. You still have to take yours before the tax deadline. But for all others ages 71 and younger, you have an extra year (or three) to begin RMDs. This could be good, if you don’t need the income—you can let your accounts grow a bit longer and delay paying taxes on the distributions. On the other hand, that delay could result in larger future RMDs… and associated taxes. Depending on your cash flow, investment goals, and tax situation, it may make sense to delay RMDs until age 73, or it may not—your financial planner can help you make that decision.

2. The penalty for missing – or just miscalculating – an RMD has been cut in half.

If you have to take an RMD, and you forget to do it by the deadline, or you somehow miscalculate the amount and don’t withdraw enough, the steep 50% penalty on the amount you owe has been decreased to just 25%. And if you can correct your mistake in a timely manner, the penalty is further reduced to 10%. Of course, you still don’t want to pay any penalty, but at least it won’t be as costly as it once was. That’s good news.

3. Employer Roth plans will no longer require RMDs – beginning in 2024.

Currently Roth IRAs are exempt from RMDs because they are considered “after-tax” money, but Roth accounts in employer plans (ex: a Roth 401(k)) don’t have that luxury. They are still subject to RMDs. So, it makes sense upon retirement to roll the Roth 401(k) into a Roth IRA to avoid RMDs and let the money grow tax-free. Beginning in 2024, that won’t be a concern. Roth accounts in employer plans will no longer be subject to RMDs. Roth 401(k)s will be free to continue growing like a Roth IRA. One can still do a rollover, but that decision can now be based on other things, like investment options.

4. Catch-Up contributions to retirement plans and IRAs are increasing – beginning in 2025.

This is a big opportunity for pre-retirees who need to build retirement savings as quickly as possible. Maybe you got a late start with investing or couldn’t contribute very much to your 401(k) until recently. In 2023, the catch-up contribution amount into an employer plan for people ages 50 and older is $7,500 per year, and for the next couple years, that will remain the case for those of you in your 50s. But beginning in 2025, people who are ages 60 to 63 can increase their 401(k) catch-up contributions to up to $10,000 per year (or 150%, whichever is greater). These will be indexed to inflation.

And beginning in 2024, IRA catch-up contributions, which are currently a flat $1,000, will be indexed for inflation also—in $100 increments.

For those who are still far away from retirement and are primarily focused on building wealth, or just getting in better financial shape:

1. Retirement plans will begin offering automatic enrollment in 2025.

Companies offering new 401(k) and 403(b) plans will have to automatically enroll eligible employees at a contribution rate of 3% beginning in 2025. This way more employees will participate in the company plan, and more will qualify for an employer match—which is essentially free money. Additionally, when employees change jobs, their retirement accounts are automatically portable, meaning that they can transfer over to a new retirement plan, regardless of the account size. This encourages employees to save rather than cash out small accounts.

2. Retirement plans will also offer an emergency savings feature in 2024.

As a rule, early withdrawals from retirement accounts are subject to a 10% penalty, unless they qualify for an exception. Because of this, along with the taxes due on those withdrawals, you really don’t want to raid your retirement account before age 59.5. But sometimes you have to. Emergencies happen.

Under the Secure Act 2.0, starting in 2024, defined contribution plans – such as 401(k)s and 403(b)s – will offer an emergency savings subaccount that non-highly compensated employees can use, without penalty, for unexpected expenses. Eligible employees will be able to contribute up to $2,500 annually (employers can set lower limits) to this retirement emergency fund and withdraw from it four times per year without paying taxes or penalties. Additionally, contributions may be eligible for an employer match, if the plan allows. You can’t get that with a traditional bank account. Of course, because the 401(k) savings subaccount is supposed to be for emergencies, it has to be invested with preservation in mind—cash, money market funds, or something equally conservative.

3. Employer matching contributions will be able to go toward paying down student loan debt in 2024.

Many people would love to contribute to a retirement plan, but are unable to contribute much – or anything – because a big portion of their earnings are going toward paying down student loan debt. And that means they could be missing out on the company match. Well, beginning in 2024, employers will be able to direct matching contributions toward student loan payments (as an alternative to matching employee deferrals). This encourages all employees – those with student loan debt and those without – to save for retirement.

4. Money left in an old 529 plan can be rolled into a Roth IRA – under certain conditions.

This feature isn’t as powerful as it seems, but it’s in the headlines, and may apply to some people, so here’s what it’s about. As a rule, 529 assets can only be withdrawn tax- and penalty-free for educational expenses. If you overfund a 529, your choices are to leave the money there and hopefully find another beneficiary to use it, or withdraw it and pay the penalty. The SECURE Act 2.0 will allow, after 15 years, a direct rollover of 529 assets to a Roth IRA, but there are other limits besides the 15-year timeframe you need to be aware of. One, the beneficiary of the Roth must be the same as the beneficiary of the 529. Two, the amount you can roll over is limited to the annual Roth contribution limit ($6,500 in 2023) and counts toward that year’s IRA contribution. Three, there’s a lifetime limit of $35,000. So, if you have an old 529 that’s just sitting there, and it’s been 15 years, it may make sense to start rolling it into a Roth IRA.

Conclusion

To sum it up, the SECURE Act 2.0 will bring about many changes in the world of retirement planning. Most are designed to help people save, and to better prepare them for retirement. The changes listed above are just some of them. For a more comprehensive list, please visit:

References