Passed in December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act included several provisions designed to address a wide variety of retirement planning topics. Considered one of the most comprehensive pieces of legislation affecting retirement savings, it contained several reforms designed to make saving for retirement simpler and more accessible for everyone.
The SECURE 2.0 Act was signed into law in late 2022, bringing several additional changes related to retirement and savings not included in the original legislation. These changes, too, were aimed at encouraging more workers to save for retirement. While not a comprehensive list, below are the takeaways we feel are the most noteworthy.
1. Required Minimum Distributions
To comply with IRS mandated tax rules, a required minimum distribution – often referred to as a “RMD” – is the amount that must be withdrawn from a qualified retirement account or IRA each year. The SECURE 2.0 Act raised the RMD age to 73, starting in 2023 and to 75, starting in 2033. Previously, the penalty for failing to satisfy the minimum distribution was 50% of the amount not taken. That penalty is now reduced down to 25%, and further to 10% if corrected within two years.
Roth 401(k)’s, unlike Roth IRA’s, are currently subject to the same RMD rules as traditional qualified retirement accounts. However, beginning in 2024, Roth 401(k)’s will no longer have minimum distribution requirements.
2. Retirement Plan “Catch Up” Contributions
Currently, individuals who have reached age 50 or older are permitted to make catch-up contributions into their employer sponsored retirement plan. The catch-up limit for 2023 is $7,500 and is indexed annually for inflation. Traditionally, plans offered the option to designate these contributions as pre-tax and/or after-tax Roth. Under SECURE 2.0, for participants with income over $145,000, all catch-up contributions need to be made to after-tax Roth accounts starting in 2024.
Additionally, beginning in 2025, the catch-up contribution limit for those aged 60-63 will increase to the greater of (1) $10,000 or (2) 150% of the standard catch-up contribution limit.
3. 529 Plan Withdrawals
It’s not uncommon for investors with 529 plans to have account balances remaining even after college expenses are paid in full. Under current law, a withdrawal for anything other than qualified education expenses may be subject to ordinary income tax and a 10% penalty.
SECURE 2.0 changed the rules surrounding 529 plan withdrawals, allowing owners to roll over excess balances from a 529 into a Roth IRA. The following guidelines must be meet for the rollover to be considered valid:
4. Automatic Enrollment
With fewer companies offering pension benefits, the responsibility to save for retirement largely falls on individual workers. Those that don’t contribute will find themselves falling behind.
Beginning in 2025, all 401(k) and 403(b) plans established on or after December 29th, 2022, will be required to automatically enroll their employees into those plans at a minimum contribution rate of 3%, but not more than 10%. The contributions must increase by 1% each subsequent year until the participant has a contribution rate of at least 10%, but not more than 15%. As an employee, you still have the option of changing your contribution rate or opting out of the plan altogether.
5. Retirement Plan Portability
Current law enables employers to initiate mandatory distributions from terminated employee’s retirement plans after a 30-60 day waiting period, without the owner’s consent. If no action is taken, and the balance is between $1,000 - $5,000, the account can be automatically rolled into an IRA. Accounts with less than $1,000 can be paid out by check. SECURE 2.0 permits plan service providers to offer plan “portability”, meaning that account balances, rather than being cashed out, will transfer to the employee’s new retirement plan automatically when they change jobs.
6. Emergency Savings
The emergency savings provisions in SECURE 2.0 are designed to make it easier for participants to set aside funds for unforeseen emergency expenses. Beginning in 2024, plans are now eligible to offer non-highly compensated employees the option of establishing an emergency savings account as part of their retirement plan. Contributions will be after-tax and capped at $2,500. Distributions can be taken anytime, and the first four withdrawals must be free from any fees.
In addition, employers may also offer a tax – and penalty free emergency withdrawal of up to $1,000 per year. Withdrawals taken under this provision must be repaid within three years.
7. Student Loan Match
Under current rules, an employer is only allowed to match a participant’s pre-tax deferral or after-tax contribution into their retirement plan. SECURE 2.0 allows employers to make matching contributions on behalf of employees making student loan payments, even if they are not contributing anything to the plan. Beginning in 2024, employers are authorized to match those loan repayment amounts.
To qualify for the match, the following guidelines must be met:
If you have any questions regarding the SECURE 2.0 Act, or what impact it may have on your financial plan, our team of advisors at Cairn Investment Group are available to assist. Contact us anytime for a complimentary consultation.