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  • Writer's pictureAspen Investment Management

SECURE Act 2.0



You may have missed the news, since the law was signed at the very end of 2022, when many were off work for Federal holidays and ringing in the new year. Whether you are nearing retirement or just entering the workforce, understanding the implications of the Secure Act 2.0 will be beneficial for your retirement planning.


Overview


In general, the Secure Act 2.0 covers a wide range of legislations related to retirement savings programs, some of which take effect immediately and some that roll out over the next few years. The act’s intentions are to help strengthen Americans’ retirement readiness. Some examples of these initiatives can be seen in making it easier for younger people to save while paying off student loans, expanding age ranges and limits for RMDs and catch-up contributions, facilitating the transfer of accounts from employer to employer, and enabling people to save for emergencies within their retirement accounts. The act builds on the SECURE Act of 2019 and represents the latest effort by Congress to make retirement savings and security more accessible for American households.


The main goals of the act were to:

  • increase access to retirement plans and savings

  • simplify administration and reporting requirements

  • secure retirement income


Key Changes


  • Required Minimum Distributions (RMDs):

    • Raising age from 72 to 73 starting in 2023 and to 75 starting in 2033

    • The penalty for failing to take an RMD will decrease to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs (Fidelity).

    • Roth accounts will no longer require RMDs in employer retirement plans (starting in 2024)

  • Catch-up contribution limits for those 60 to 63 years old will increase for employees in their workplace plan. Starting in 2025, 60- to 63-year-olds will be able to contribute a catch-up of $10,000 annually. The catch-up amounts for employer-sponsored plans and IRAs will be indexed to inflation going forward.

  • Plan sponsors will be allowed to link emergency savings accounts to individual account plans. The plans could allow up to $2,500 contributed annually to a Roth “emergency fund” and the first four withdrawals in a year would be tax and penalty free. This will start in 2024.

  • Starting in 2024, employers will be allowed to “match” student loan payments in the form of matching payments to a retirement account.

  • Emergency withdrawals will be allowed with limits for personal or family emergency expenses

  • Participation requirements expanding for long-term part-time workers

  • For 401(k) and 403(b) plans specifically:

    • requiring new 401(k) and 403(b) plans to include automatic enrollment and escalation

    • increasing automatic rollover limits

    • revising self-correction options for the Employee Plans Compliance Resolution System


Key Takeaways for Those Near Retirement


For people near retirement age, these changes to RMDs, higher catch-up contributions, matching for Roth accounts, qualified charitable distributions (QCDs), and other changes for annuities are significant. The increase in the age at which owners of retirement accounts must start taking RMDs from 72 to 73, as well as the reduced penalty for failing to take an RMD, will give you an additional year to delay withdrawing your deferred savings and more time to make decisions that align with your financial goals. Starting in 2025, you will have the opportunity to make higher catch-up contributions to a workplace plan, with the limit potentially increasing every year based on inflation. Employers will also be able to provide you with the option of receiving vested matching contributions to Roth accounts, which will grow tax-free. Additionally, qualified charitable distributions (QCDs) will become more accessible as people who are age 70½ and older will be able to elect a one-time gift up to $50,000 to a charitable organization.


Key Takeaways for Those Further From Retirement


For those just entering the workforce, the SECURE Act 2.0 can affect your retirement savings in several ways. First, starting in 2025, businesses must automatically enroll you if you are an eligible employee in 401(k) and 403(b) plans at a minimum contribution rate of 3%. This makes it easier for you as an employee to start saving for retirement. Second, retirement plan service providers can offer automatic portability services, allowing you to transfer your low-balance retirement accounts to a new plan when you change jobs. This is more important than ever, as most people change jobs numerous times over the course of their careers. Third, starting in 2024, defined contribution retirement plans can offer an emergency savings account designated as a Roth account for non-highly compensated employees. This type of account allows contributions up to $2,500 annually, with the first 4 withdrawals in a year being tax-free and penalty-free. Additionally, starting in 2024, employers will be able to match your student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off student loans. Lastly, after 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to contribution limits and an aggregate lifetime limit of $35,000.


Conclusion


Every single person's financial situation is unique, so while we hope we’ve provided you with clear information that clarifies what these changes mean for you, we always advise consulting with an experienced financial advisor to fully understand how the changes from SECURE 2.0 apply to you.


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