Key SECURE Act 2.0 Changes To Know About

The SECURE Act 2.0 was signed into law in December 2022 to strengthen American’s financial readiness for retirement. Provisions in this legislation impact all Americans, including those who may have recently retired and will likely impact how you save for retirement as well. Let’s explore the ins and outs of this new law to equip you with information you need regarding the same.

What to know if you’re nearing (or in) retirement

RMD changes
If you want to familiarize yourself with required minimum distributions (RMDs) before delving into this section, feel free to check out this blog post. At their core, however, RMDs are the amount of money the IRS mandates you withdraw from your retirement account(s)—whether a traditional IRA, employer-sponsored retirement plan, SEP, or SIMPLE IRA—each year.

While it was historically necessary for account owners to begin taking RMDs upon turning 72, the SECURE Act 2.0 raises this age limit to 73 (and then 75, beginning in 2033).

The new Act also decreases RMD-related penalties. Previously, account owners would be charged 50% of any RMD amount not taken; the new law reduces this amount to 25%, which can be reduced even further (to 10%) if the holder takes timely action to withdraw the required amount and submit an updated tax return on time.

Additionally, employer retirement plan-linked Roth accounts—401(k)s, 403(b)s, and 457(b)s—will be exempt from RMDs beginning in 2024.

Roth account matching
The SECURE Act 2.0 allows workers to receive vested matching contributions to their Roth accounts. Under the old rules, employer-plan matching was performed on a pre-tax basis—with the tax bill arriving later. This new model, however, allows employers to match contributions post-tax: paving the way for tax-free investment growth.

Note that this new option is discretionary, and employers can choose to make pre-tax matches or not provide any at all.

Catch-up contributions
If you’re age 50 or older but didn’t save enough money for retirement when you were younger, you’ll be happy to know the IRS established rules to help make up for this shortfall via “catch-up contributions”: additional contributions you can make to your 401(k) and IRA accounts above standard limits. Here’s how the new law is impacting catch-up contributions:

Beginning in 2024, annual IRA catch-up contributions will be adjusted annually for inflation.

Additionally, if you earn more than $145,000 from an employer in 2026 and contribute to an employer-sponsored plan—such as a 401(k), 403(b), or 457(b)—you’ll be required to make catch-up contributions to a Roth version of your respective retirement plan beginning in 2026: meaning you’ll pay taxes on your catch-up money upfront rather than contributing pre-tax money, as you can now.

If you’re between the ages of 60 and 63, you can currently only add up to $7,500 per year to your workplace retirement plan—including 401(k)s. Starting in 2025, however, the annual contribution amount will jump to $10,000 (known as a “special” catch-up contribution for this age group) and be indexed to inflation: further enhancing related financial benefits.

Catch-up contribution limits for SIMPLE plans, meanwhile, will increase by 10% starting in 2024; beginning in 2025, account holders between the ages of 60 and 63 will also receive a “special” limit of $5,000 (or 150%) of the 2025 catch-up contribution limit (whichever is greater) for other eligible workers. This amount will be adjusted for inflation on an annual basis as well.

Qualified charitable distributions (QCDs)
Now, an IRA owner can make a one-time election to use a QCD (a direct transfer of funds from your IRA—payable directly to a qualified charity) to fund a split-interest entity (generally an account wherein contributions are shared by multiple beneficiaries, including a nonprofit organization). The limit in this case is $50,000 and can be used for a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity.

What to know if retirement is still years away

Automatic retirement plan enrollment
The SECURE Act 2.0 requires businesses to automatically enroll employees in 403(b) and 401(k) plans. Under the old rules, workers were often compelled to voluntarily opt into these benefits—which many elected not to do. Starting in 2025, however, eligible employees will be automatically enrolled in employer retirement plans at an initial contribution amount between 3% and 10%; this number will increase one percentage point annually until it reaches 10–15%.

The new changes also make it easier to transfer retirement plans to ultimately deter low-earning employees from cashing out upon leaving an employer, as simplifying this process will encourage workers to keep their current (and growing) retirement plan intact when switching companies.

Student loan debt contributions
The SECURE Act 2.0 also addresses issues related to the student loan crisis. In 2024, employers will be able to match employee student loan payments with retirement plan payments on qualified student loans: giving graduates extra incentive to pay off their student loan debt and employers another way to attract and retain talent.

529 plans
People with unused 529-plan funds now have the option to transfer leftover funds to a Roth IRA for that same beneficiary (just note the rollover amount cannot exceed annual IRA contribution limits and must have existed in the 529 account for at least five years). Also keep in mind a $35,000-lifetime cap on Roth IRA rollovers exists for each 529 account beneficiary, and the 529 plan must have existed for at least 15 years.

Emergency savings
The new rules also make it possible for employers with defined contribution retirement plans to add an emergency savings account in 2024 that takes shape as a designated Roth account accepting contributions for low-earning employees (as defined by the employer).

Employee contributions are capped at $2,500 per year (though the employer can set a lower bar) and, depending on specific plan rules, may be eligible for an employer match.

This allows for penalty- and tax-free withdrawals up to four times a year—after which traditional penalty and tax obligations kick in—and for employees to access money in emergency situations while encouraging individuals to save for a rainy day.

Additional changes worth knowing

Savers Tax Credit
With the US government committed to helping low-earning workers bolster their retirement plans, the Savers Tax Credit provides eligible individuals with up to 50% on their retirement plan contributions—with a maximum match of $1,000. Qualifying contributions can hail from IRA contributions, a SIMPLE IRA plan, or salary deferrals to a 401(k), 403(b), or governmental 457(b) plan.

Inherited IRA accounts
Previously, individuals who inherited an IRA (including a Roth IRA) could stretch out tax liability over a lifetime provided it was a non-spouse inherited IRA. Now, beneficiaries must liquidate those accounts within ten years and hence pay all taxes within ten years of inheriting the account. These changes apply to accounts inherited in 2020 and beyond.

Long-term care insurance
Beginning in 2025, employees will enjoy the ability to withdraw up to $2,500 from their company’s retirement plan to pay for long-term care insurance. The permitted amount is either up to 10% of the vested plan balance or $2,500 (whichever is lower).

401(k) plans for part-time workers
Under the new rules, employers must make 401(k) plans available to part-time workers who have worked at least 500 hours annually for three consecutive years (or 1,000 hours in a single year).

Removal of age limits for IRA contributions
Previously, anyone wishing to contribute to an IRA account was unable to do so after hitting a certain age. Moving forward, however, individuals over the age of 70½ can continue making IRA account contributions provided they’ve earned income. The impetus behind this measure is to incentivize those working later in life to save additional money and continue to build their nest egg over a longer period of time.

SECURE Act 2.0 changes: the bottom line

Though this post doesn’t provide a laundry list of all retirement-related changes taking effect with the new legislation—the actual list is much longer and much more complex—we hope you’re now at least a tad more familiar with them and recommend speaking with a financial advisor to learn more. These professionals not only track these changes but can also ensure you capitalize on any provisions to help boost your retirement nest egg.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.