The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed in 2019 and enacted under former President Donald Trump on December 20, 2019. The original SECURE Act was part of the Further Consolidated Appropriations Act of 2020. In 2022, the act was amended, and the SECURE 2.0 Act was signed into law. The primary objective of the new act is to enhance retirement security for people and facilitate easier, better, and faster savings. Since the landscape for retirement planning has considerably changed over the years with a shift from traditional to newer retirement tools, increasing life expectancies, and evolving work patterns, retirement saving practices also need to be altered. The SECURE 2.0 Act aids with this.
A financial advisor can help you understand the provisions of the SECURE 2.0 Retirement Act. This article also explores SECURE Act 2.0 updates, the provisions of the act, and how it could affect your retirement savings.
What is the SECURE Act 2.0?
The SECURE Act 2.0 is a law aimed at further enhancing retirement security and expanding savings opportunities for individuals. It builds upon the original Secure Act of 2019 and was signed into law by President Joseph R. Biden on December 29, 2022. The Act introduces new provisions and modifications to the existing retirement savings landscape. SECURE 2.0 is a part of the Consolidated Appropriations Act (CAA) 2023. It aims to encourage retirement savings, increase access to retirement plans, and provide additional benefits for retirees.
The SECURE Act 2.0 proposes several new provisions, such as automatic enrollment into retirement plans, new Required Minimum Distribution (RMD) rules, changes to catch-up contribution limits of retirement plans, better access to retirement funds, and more.
The implementation timeline of all the provisions within the Secure Act 2.0 varies. For now, the act is following a phased approach. Certain provisions have come into effect immediately, while others are scheduled to commence in subsequent years. For instance, automatic retirement plan enrollment is set to begin in 2025, ensuring more individuals are enrolled in retirement plans. On the other hand, the increase in the RMD age from 72 to 73 started on January 1, 2023.
7 SECURE Act 2.0 updates you should know
1. Expanding 401(k) catch-up contributions
The SECURE Act 2.0 introduces notable enhancements to catch-up contributions, particularly in qualified workplace retirement plans like 401(k)s. Currently, individuals aged 50 and older can make additional catch-up contributions of $7,500 per year. Starting in 2025, a new category of catch-up contributions will be available for workers aged 60 to 63 years. The new limit will be $10,000 or 150% of the standard catch-up contribution limit, whichever is higher of the two. These limits will be adjusted regularly for inflation, allowing older workers to save more and bridge the retirement savings gap.
Another notable change is that, at present, individuals can make catch-up contributions in pre- (traditional) and after-tax (Roth) accounts. However, from 2024, all catch-up contributions must only be deposited in Roth accounts. Only employees with compensation of $145,000 or less can make catch-up contributions to pre-tax traditional accounts.
2. Inflation-indexed IRA catch-up contributions
The Individual Retirement Accounts (IRAs) is the second retirement account to benefit under the SECURE Act 2.0. While the standard contribution limit for IRAs in 2023 is $6,500, individuals aged 50 and older can currently contribute an additional $1,000 as catch-up contributions. This catch-up contribution limit, however, has remained the same over the years without any adjustments for inflation. The SECURE Act 2.0 addresses this issue by gradually increasing IRA catch-up contributions in line with the cost of living. IRA catch-up limits will see increases rounded down to the nearest $100. For instance, if the annual cost of living adjustment raises the limit to $1,155, the actual catch-up contribution will likely be $1,100.
The improvements to catch-up contributions under the SECURE 2.0 Retirement Act are significant for individuals planning for retirement. Many people face challenges in saving enough for their retirement when faced with inflation. These new adjustments will particularly help them tackle inflation.
3. New age requirement for RMDs
Under the current law, individuals are required to begin RMDs in the year they turn 72. These distributions can significantly impact annual income and tax liabilities for people with substantial savings in pre-tax retirement accounts as they force you to withdraw your money even if you do not need it. SECURE Act 2.0 adjusts the ages at which RMDs start based on the individual’s birth year. Here’s how this works:
If you turn 72 after 2022 and your 73rd birthday falls before 2030, RMDs will now begin at age 73. For those who turn 73 after 2030 and reach 74 before 2033, RMDs will commence in the year they turn 74. Individuals turning 74 after 2034 must start their RMDs at age 75.
4. Automatic 401(k) enrollment
The SECURE 2.0 Retirement Act has also introduced automatic enrollment to encourage more people to use these accounts. The implementation is said to take effect in 2025. All new 401(k) plans will now automatically enroll participants in a 401(k). The default contribution rate will be 3% of the employee’s salary. Every year, the rate will increase by 1% until a maximum of 10%. While the enrollment is automatic, employees will have the option to opt out if they choose not to participate in the plan.
It is important to note that small businesses with ten or fewer employees will be excluded from automatic enrollment. Additionally, government plans, church plans, and new companies that are less than three years old will also be excluded from automatic enrollment under SECURE 2.0.
5. Emergency savings and distributions for 401(k)s
The SECURE Act 2.0 will allow employers to create an emergency savings account for employees and link it to their retirement accounts. This account will follow the same automatic enrollment process as 401(k)s. The first four annual withdrawals will be exempt from all fees or charges. The employee contribution rate will be set at 3%. The emergency savings account can have a maximum account balance of $2,500. This money will be accessible to the employees if and when they quit their jobs. Employees can choose from two options – cash out the money or roll it over into a retirement account.
The SECURE Act 2.0 has also introduced the concept of emergency distributions. At present, 401(k)s levy a 10% penalty on early withdrawals made before 59.5 years of age. However, SECURE Act 2.0 introduces a provision to allow account holders to withdraw up to $1,000 as an emergency distribution without incurring any penalties. This will allow people to tend to their immediate needs without causing too much burden on their retirement nest egg. However, account holders will have to repay the distribution within three years. They will not be able to make any additional withdrawals until the initial distribution is repaid.
6. Automatic 401(k) transfers
Switching jobs is a considerable hassle with regard to keeping up with your company-sponsored retirement plans. Transferring account balances, rolling funds to another account, or sticking with the old employer’s plan have all been chaotic and limiting for most people. The SECURE Act 2.0 will now permit automatic transfers from the old employer’s plan to the new one for accounts with a balance of under $5,000. This move can make transfers quicker and ensure fewer losses for employees over the years.
7. 529 to Roth IRA Conversions
Although the 529 education savings plan is a popular and preferred tool, it has some limitations. The restricted use of money has been a concern for parents whose children do not end up going to college. In addition, the 520 education savings plan benefits are not uniform across the country. Some states offer tax deductions, while others do not. The plan does offer tax-free growth, but non-qualified withdrawals incur a 10% penalty. The SECURE Act 2.0 introduces provisions to allow individuals to convert funds from a 529 plan to a Roth IRA with no penalties.
The SECURE Act 2.0 permits the conversion of up to $35,000 from a 529 plan to a Roth IRA without penalties if the 529 account has been open for more than 15 years. However, these rollovers are subject to the annual contribution limits of the Roth IRA. As of 2023, the IRA allows a maximum contribution limit of $6,500 per annum. This means that if you wish to convert up to the total limit of $35,000, you can do so in approximately five years.
5 benefits of SECURE Act 2.0 retirement plan amendments for retirees:
1. Higher savings for older contributors
Catch-up contributions have primarily always benefited those who start retirement planning late in life. Catch-up contributions in 401(k) allow individuals aged 50 and over to save an additional $7,500 per year (as of 2023). Introducing a new category of catch-up contributions for workers aged 60 to 63 can provide further benefits, enabling people to save an even greater amount toward their retirement goals. This can be helpful in two ways. Firstly, people get enough time and the means to make up for the lost time and build their retirement pool. Secondly, people can beat inflation by contributing more to their retirement accounts.
The same can be said in the case of IRAs. The indexed catch-up contributions will address the gap caused by rising living costs. With the gradual increase in the value of catch-up contributions, individuals aged 50 and older can contribute more now and bolster their retirement savings.
2. Tax savings and flexibility in distributions due to higher RMD ages
The RMD structure has been rigid for years, forcing people to withdraw their funds irrespective of their needs. The new RMD rules provide increased flexibility to retirees to plan their distributions. Delayed RMDs can allow people to push their tax liabilities to the future, accumulate a bigger retirement corpus for the later stages of their life, and account for increasing life expectancies. However, it is essential to understand that delaying RMDs can have potential trade-offs, too. Delaying distributions can lead to a higher tax bill eventually. The bigger the account balance, the higher the distributions and the bigger the tax cut.
Make sure to carefully assess your tax bracket, expected income needs, age, health, and retirement goals before withdrawing your money. Additionally, consult with a financial advisor to create a strategy aligned with your unique situation.
3. Employee satisfaction because of automatic enrollment
One of the primary advantages of automatic enrollment is that it simplifies the process of participating in a 401(k) plan. Instead of employees having to opt in and make enrollment decisions actively, they are automatically enrolled unless they choose to opt out. Automatic enrollment also encourages people to start saving for retirement earlier in their careers. When employees are enrolled with a predetermined contribution rate, they end up saving consistently year on year. As a result, employees have a longer time horizon for their investments to grow, potentially leading to a more substantial retirement nest egg.
Many employers offer matching contributions as part of their 401(k) plans. Automatic enrollment ensures that employees who may have otherwise missed out on these employer-matching contributions now have the opportunity to benefit from them.
4. Improved ways to tackle emergencies
Life is unpredictable; unexpected expenses or emergencies can arise anytime, such as medical bills, home repairs, or job loss. Having an emergency fund accessible through the 401(k) allows individuals to tap into these funds when needed, reducing financial stress and providing a cushion during challenging times. The emergency distributions also provide quick access to funds when you need them the most. Compared to other sources of funds, such as loans or credit cards, an emergency distribution from a 401(k) can be more cost-effective, as it does not incur penalties or high-interest charges.
Moreover, these two provisions ensure that employees are prepared for financial emergencies while planning their retirement. Neither goal disrupts the other.
5. Fewer penalties
The SECURE Act 2.0 removes some penalties and offers more room for people to plan for their needs. The 10% penalty in the case of early withdrawals is removed, allowing you to access your money without the fear of loss. Additionally, you can also convert your 529 plan to a Roth IRA without any penalty as long as the 529 account has been open for more than 15 years. This allows you to use the account for more purposes than your child’s education while not losing your money to penalties.
To conclude
The SECURE Act 2.0 has brought a lot of flexibility and peace of mind to people. Most people have welcomed the changes. Although the complete implementation will take place in phases, which may require the next couple of years, the act has undoubtedly already made an impact.
WiserAdvisor’s free advisor match service can help you search for a financial advisor who can help you make the most of the provisions of the SECURE 2.0 Retirement Act. By answering a few basic questions about your financial needs, you can be connected to 1-3 advisors who are best suited to meet your financial requirements using our matching tool.
To learn more about suitable retirement strategies for your specific financial situation, visit Dash Investments or email me directly at dash@dashinvestments.com.
Sincerely,
Jonathan Dash
Founder and President
Email: info@dashinvestments.com