Three years after The Setting Every Community Up for Retirement Enhancement (SECURE) Act was first enacted, Congress has now passed the Secure Act 2.0. Signed into law by President Biden just before the end of the year, it brings positive changes to the U.S. retirement system designed to help Americans save more for retirement.
The original Secure Act, passed in 2019, raised the age for required minimum distributions to age 72, changed the distribution rules for non-spouse inherited IRAs, made it easier for small businesses to set up retirement plans, and eliminated the age limit for IRA contributions, among other things.
Now the new provisions address gaps that previously left some people on the sidelines of retirement savings. With bipartisan support, the new changes should be a help to most Americans in their retirement planning. To help you understand how this could affect your own retirement preparations, here is a list of some of the most important provisions in the new legislation.
#1. 529 Account Rollover
Perhaps one of my favorite provisions is that unused 529 funds can be rolled over to a Roth IRA for the same beneficiary, broadening uses for unused college savings money. The 529 account has to be in existence for 15 years (so start saving for education early!), and the Roth IRA will preserve both tax free growth and tax free withdrawals in the future.
#2. Required Minimum Distribution Increase
The required minimum distribution (RMD) age has increased from 72 to 73 years old by 2023 and then up to age 75 by 2033. As Americans are living longer, the longevity risk of outliving their money becomes a larger risk. A later age for RMDs helps preserve tax-deferred growth and may allow for more strategic withdrawal strategies.
#3. Catch-Up Contributions Increase
Catch up contributions increased for those age 60-63, taking effect in 2025. For workers behind on retirement savings or wanting to make the most of their likely highest earnings years, a saver can make a catch-up contribution of $10,000 instead of the current $6,500.
#4. No More RMD for Roth 401(k)
RMD rules for Roth 401(k) changed as well. Previously, Roth 401(k)s had RMD requirements. While the funds are not taxed when withdrawn, a saver would lose the tax-free growth. Starting in 2025, they will no longer be subject to RMD requirements and function like Roth IRAs. This provision can be a big advantage for those wanting to leave tax-efficient assets to heirs in their estate planning.
#5. Automatic 401(k) Enrollment
Businesses that start new 401(k) plans would be required to automatically enroll participants in the plan and make salary deferrals. Participants can of course opt-out, but one of the best financial planning secrets is inertia. Our brains are more likely to take the path of least resistance.
#6. Better Employer 401(k) Match Options
If a retirement plan participant is making large student loan payments and are unable to put money aside into the 401k, employers can now offer the 401k match based on student loan payments. This allows a worker to not have to choose between student debt payments and taking advantage of the “free money” offered through an employer match.
#7. Emergency Savings Account for Workers
Employers can now set up a separate emergency savings account for workers, allowing them to choose to enroll or automatically enroll them in an emergency savings account up to $2,500, making it easier to build up emergency savings. This savings can be done in addition to 401k savings.
#8. Penalty Free Withdrawals
Another provision that would help workers encountering an emergency is a penalty-free withdrawal of up to $1,000 from a tax-deferred retirement account.
#9. Federal Retirement Match
Lower income earners could be eligible for a federal retirement match of up to $1,000 if they save $2,000 on their own in a retirement account. This would not become effective until 2027 and would replace the current nonrefundable tax credit for lower income retirement savers.
#10.QLAC Deferred Annuity
Have you heard of a QLAC (Qualified Longevity Annuity Contract)? It is a deferred annuity that begins paying in the latter part of retirement, up to age 85, and can be funded with a transfer from your 401k or IRA. The amount transferred to a QLAC would be excluded from RMD requirements, saving on taxes. This provision has been in place, but the amount that you can put into a QLAC increased from $135,000.
Don’t Delay Retirement Planning
Though the Secure Act 2.0 will bring many benefits, with roughly half of Americans not saving for retirement in the first place, there are still larger issues to address. Women in particular face difficulties when saving for retirement. But at least the new changes are a good start.
By increasing auto enrollment and cutting red tape for small businesses, Congress is hoping that more people will find it easier to save, and feel empowered by the process. Because your retirement fund really is crucial to your future well-being.
If you don’t start saving for retirement as early as possible, and really commit to these savings, then you need to consider how you will be able to manage in the post-employment chapter of your life. Looking at when you will actually be able to retire based on your current rate of savings can be a real eye-opener.
If you’d like to discuss your current retirement plan, or get expert advice and guidance on how to start building one, then please don’t hesitate to get in touch.