Did you know a large new bill was signed into law in December, 2022? The Secure Act 2.0 went somewhat under the radar, but its impact on retirement plans and personal finances will surely be felt for years to come. In this blog post, I discuss what the SECURE Act 2.0 is and 7 of the most impactful changes that this legislation contains.
What is the Secure Act 2.0?
The SECURE Act 2.0 is a follow up to the SECURE Act of 2019. The acronym SECURE stands for Setting Every Community Up for Retirement Enhancement. The original SECURE Act increased the Required Minimum Distribution age to 72 and made some other changes aimed at bolstering retirement savings through employer plans and IRAs. The Secure Act 2.0 takes these changes a step further with dozens of provisions aimed at promoting retirement savings. Specifically, the act aims to make it easier for young people to pay off student debt while saving, to enable people to save for emergencies within retirement accounts, and to provide more overall flexibility with accounts like 401(k) plans, 403(b) plans, IRAs and 529 Plans. While there are several provisions not discussed in this blog post, I have laid out the 7 most impactful changes.
7 Ways SECURE 2.0 Impacts You:
1. Required Minimum Distribution (RMD) Changes
The Required Minimum Distribution start date has been pushed back to age 73 for those that turn 72 in 2023. For those that turn 74 after 2032, the RMD start date was pushed back to age 75.
Starting in 2024, there will be no RMD’s for Roth 401(k)’s. Previously, there were.
The excise tax or tax penalty for failing to make an RMD has been lowered from 50% to 25%. In addition, if the RMD is properly corrected, the penalty can be lowered to 10%.
2. New Student-Loan Matching Program
Starting in 2024, employers can match student loan payments for their employees. Student loan payments will be treated as Employee Elective Deferral for purposes of matching contributions. In the past, employers could only match your retirement account contributions. In 2024, they will be able to match your student loan payments as well.
3. 529 College Savings Plan Distributions
Starting in 2024, beneficiaries of 529 plans may roll over up to $35,000 during their lifetime to a Roth IRA. These rollovers will be treated as Roth IRA contributions and still subject to the annual contribution limits. Note, the 529 plan must be open for more than 15 years to be eligible.
4. New Emergency Savings Account
Starting in 2024, employers can establish an “Emergency Savings Account.” This new account allows employees to contribute up to $2,500 per year into a Roth-style account. Distributions will be treated like a Roth distribution and tax-free if certain requirements are met.
5. Retirement Account Contribution Changes
Starting in 2025, new 401(k) and 403(b) plan participants will be automatically enrolled into the plan when eligible. The initial contribution will be at least 3% of salary but not more than 10%. Each year, contributions would increase by 1% until a goal of 10% is reached.
401(k) and 403(b) catch up contribution limits have been increased to $7,500 in 2023 (previously at $6,500). Starting in 2025, catch-up contributions for those ages 60 to 63 will be increased to the greater of $10,000 or 50% more than the regular catch-up contribution amount in 2024. Catch up contribution limits will be indexed for inflation starting in 2025.
IRA catch up contribution limits for those over the age of 50 (currently $1k/year) will be indexed for inflation starting in 2024.
The SECURE Act 2.0 adds a 3-year statute of limitations for excise tax on excess contributions. Previously, there was not statute of limitations.
6. Retirement Account Distributions Changes
The SECURE ACT 2.0 added some exceptions to the 10% early withdrawal penalty typically applied when you take money from a retirement account before age 59.5. These include:
Effective immediately, the penalty is waived if you are diagnosed with a terminal illness.
Effective immediately, in the case of financial hardship, up to $1,000 per year may be withdrawn from a 401(k) or IRA penalty free. The employee has the option to repay the distribution within 3 years. No further distributions will be allowed until the distribution is paid in full.
Effective 2024, hardship withdrawals are available for victims of domestic abuse.
Effective 2026, withdrawals of u to $2500 per year can be made to pay premiums on certain long-term care policies.
7. New National Retirement Savings Lost and Found
The Department of Labor will create a national online searchable lost and found database. This will allow people to locate small retirement accounts left at their old employers more easily.
Why does it matter?
While initially the SECURE Act 2.0 might lead to lots of confusion about the logistics of making these changes, in the long run it should help most Americans in their efforts of saving for retirement. Retirement planning is still a struggle for many out there, and both versions of the SECURE Act aim to address that struggle. Our team of financial planners is also available to assist with the complicated world of retirement planning. To review your retirement plan or how the SECURE Act 2.0 might impact you and your family, schedule a meeting by clicking HERE.
Alex Sierra, CFP