SECURE Act 2.0: How the Change in Retirement Laws Will Affect You
Let’s jump right in with an overview – the Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act, was signed into law in late 2019 and is now referred to as SECURE Act 1.0.
SECURE Act 1.0 included provisions that raised the requirement for mandatory distributions from retirement accounts and increased access to retirement accounts.
But it didn’t take long for Congress to enhance the landmark bill that was enacted barely three years prior.
Tucked inside a 4,155-page, $1.7 trillion spending bill passed at the end of 2022 are plenty of goodies, including another overhaul of the nation’s retirement laws.
Dubbed SECURE Act 2.0, the bill enjoys widespread bipartisan support and builds on SECURE Act 1.0 by strengthening the financial safety net by encouraging Americans to save for retirement.
9 key takeaways on SECURE Act 2.0
- Changing the age of the required minimum distributions.
In 2020, 1.0 increased the age for taking the required minimum distribution, or RMD, to 72 years from 70½. If you turned 72 in 2023, RMD begins at age 73 thanks to SECURE Act 2.0.
Starting in 2033, RMD begins at age 75.
As of 2024, employees enrolled in a Roth 401(k) aren’t required to take RMDs from their Roth 401(k).
In our view, the SECURE Act 1.0 and 2.0 updates were long overdue. The new rules recognize that Americans are living and working longer.
- RMD penalty relief.
Beginning in 2023, the penalty for missing an RMD was reduced to 25% from 50%. And 2.0 goes one step further. If the missed RMD is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%.
- A shot in the arm for employer-sponsored plans.
Too many Americans do not have access to employer plans or simply don’t participate.
Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to automatically enroll employees at a rate between 3% and 10% of their salary.
The new legislation also allows for automatic portability, which will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out.
In order to encourage employees to sign up, employers may offer gift cards or small cash payments. Think of it as a signing bonus.
Employees may opt out of the employer-sponsored plan.
- Increased catchup provisions.
In 2025, for 401(k) and other employer-sponsored plans, 2.0 adds a "special" catch-up contribution limit for workers age 60 to 63 years. The special catch-up contribution maximum for workers age 60 to 63 years is the greater of $10,000 or 150% of the standard catch-up contribution amount for 2024. The $10,000 amount will be adjusted for inflation each year starting in 2026.
Starting in 2024, if your wages are over $145,000, 2.0 requires all 401(k) catch-up dollars to be deposited into a Roth account.
- Charitable contributions.
Starting in 2023, 2.0 declared that the annual IRA charitable distribution limit of $100,000, known as a qualified charitable distribution (QCD), will be indexed to inflation. For 2024, the limit is now $105,000.
It also allows a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. The $50,000 limit counts toward the year’s RMD.
One must be 70½ or older to take advantage of these provisions. Be sure to consult your financial planner for more detailed information.
- Back-door student loan relief.
Starting this year, employers are allowed to match student loan payments made by their employees. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement.
Additional provisions
- Disaster relief.
You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account.
- Help for survivors.
Victims of abuse may need funds for various reasons, including cash to extricate themselves from a difficult situation. 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free.
- Rollover of 529 plans.
Starting this year and subject to annual Roth contribution limits and earned income, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary. The 529 plan must be at least 15 years old.
In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.
Final thoughts
We at FIAI welcome these changes. Many Americans lack adequate savings, and this bill helps address some of the challenges many face as they march toward retirement.
What we have provided here is a high-level overview of the SECURE Act 2.0. Keep in mind that it is not all-inclusive.
We are always here to assist you, answer your questions, and tailor any advice to your needs. Additionally, feel free to reach out to your tax advisor with any tax-related questions.
