Retirement Enhancement: How the SECURE Act 2.0 Changes May Affect You

The $1.7 trillion omnibus appropriations bill passed by the 117th Congress and signed into law before the end of 2022 included dozens of retirement-related provisions collectively known as the SECURE 2.0 Act. (The acronym stands for Setting Every Community Up for Retirement Enhancement.)

The SECURE 2.0 legislation provides a slate of changes that could help strengthen the retirement system and Americans’ financial readiness for retirement while making it less costly to withdraw those savings. The legislation builds on the earlier SECURE Act of 2019 that cleared the way for employers to add annuities to their 401(k)-retirement plan and raised the age for required minimum distributions (RMD), which obligate retirees to begin pulling money from their retirement accounts.

In 2021, 68% of retirement plan participants believed they were on track to have enough money to retire with their preferred lifestyle, according to a recent BlackRock survey. In 2022, that number declined by five points. By increasing automatic enrollment and cutting red tape for small businesses, Congress is hoping that more people will feel empowered to save.

• The most notable provision in the bill increased the age when RMDs would need to start. The bill increased RMDs from age 72 to age 73 as of January1, 2023 and then to age 75 in 2033. Additionally, the penalty for failing to take RMDs was reduced to 25%, and in some cases, 10%. Individuals who have already started taking RMDs cannot opt back out.
• The bill also created larger “catch-up” contributions for older retirement savers. Currently (in 2023), you can put an extra $7,500 annually in your 401(k) and 403(b) once you reach age 50. SECURE Act 2.0 increased the limit to $10,000 starting in 2025 for savers aged 60 to 63. Catch-up amounts are also indexed for inflation beginning in 2024. That means the current $1,000 cap on catch-up contributions will rise annually to keep up with inflation. Additionally, all catch-up contributions will be subject to Roth treatment (i.e., not pretax) except for workers who earn $145,000 or less per year.

• Requiring automatic 401(k), 403(b) enrollment: Since the late 1990s, employers have had the option to add eligible new employees to their retirement plans, typically with a contribution level of 3% of their annual salary. SECURE Act 2.0 requires employers with 401(k) and 403(b) plans to automatically enroll all new, eligible employees at a 3% contribution rate (but not more than 10%). Businesses with 25 or fewer workers and new companies in business for less than three years are among those that would be excluded from the mandate. It also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee’s low balance retirement accounts to a new plan when they change jobs. The change could be especially useful for lower-balance savers who typically cash out their retirement plans when they leave jobs, rather than continue saving in another eligible retirement plan. This provision will not start until 2025.

• Broadening employer 401(k) match options: Beginning in 2024, employers have the option to match student loan payments with a contribution to the employee’s retirement plan account. The goal is to help workers who are burdened by student loans and can’t afford to make a contribution to their retirement plan by ensuring that they are accumulating some retirement savings even as they pay down their loan.

• Improving worker access to emergency savings: Typically, there’s a 10% penalty if you withdraw money from a 401(k) or other pretax retirement account before age 59½. The new legislation enhances several existing exceptions, including covering certain private-sector firefighters and public safety officers. It also adds new categories, allowing individuals who are terminally ill to make limited penalty-free withdrawals. For 2024, a catchall exception kicks in, allowing anyone with a personal or family emergency to withdraw up to $1,000 a year penalty-free. There are also exceptions for victims of domestic abuse and victims of a qualified federally declared natural disaster.

• $2,500 rainy-day emergency savings accounts: The legislation allows employers to automatically enroll employees who make no more than $150,000 for 2023 in emergency savings accounts linked to a 401(k) plan. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first 4 withdrawals in a year would be tax- and penalty-free.

• Increasing part-time workers’ access to retirement accounts: The original SECURE Act allowed part-time workers who booked between 500 and 999 hours for three consecutive years to be eligible for their company’s 401(k) plan. SECURE Act 2.0 reduces that eligibility to two years. Companies already have been required to grant eligibility to employees who work at least 1,000 hours in a year.

• Boosting how much can be put in a qualified longevity annuity contract (QLAC): A QLAC is a deferred annuity that you can buy, with guaranteed payouts for life deferred out to as late as age 85. Formerly, the maximum that could go into a QLAC was either $145,000 or 25% of the value of your retirement accounts, whichever was less. SECURE Act 2.0 eliminated the 25% cap and increased the maximum amount allowed in a QLAC to $200,000.

• Creating a federal matching contribution for lower-income retirement savers: An existing tax credit (Saver’s Credit) for low- and moderate-income individuals who contribute to retirement accounts now becomes a limited government-funded matching contribution. That contribution is then required to be deposited into an IRA or other retirement plan.

• Changing the required minimum distribution (RMD) rules for Roth 401(k)s: Currently, while Roth IRAs come with no RMDs during the original account owner’s life, that’s not the case for Roth 401(k)s. Starting in 2024, the pre-death distribution requirement will be eliminated.

• Roth employer matching: The new legislation permits employers to offer Roth matching contributions into an employee’s 401(k) account. Under the new rules, employees can now choose to take the Roth match, which means they are able to pay taxes up front and then later take out the contributions, and potentially the earnings, tax-free.

• The ability to rollover a 529 plan to a Roth IRA is particularly helpful for young people who did not use all the 529 plan savings to redirect those funds to their own retirement. While certain conditions will need to be met, a potential amount of up to $35,000 can be rolled over the course of a lifetime from a 529 plan into a Roth IRA in the same name. That provision becomes effective in 2024.

• Helping military spouses get access to retirement plans: SECURE Act 2.0 creates tax credits for small businesses that let military spouses enroll right away in their plan and qualify for immediate vesting of any employer matches.

The bill also includes incentives for small businesses to set up retirement savings plans for their workers, encourages individuals to set aside long-term savings, and makes it easier for annuities to be an income option for retirees.

However, as some retirement policy experts point out, the latest legislation does little to extend access to the tens of millions of Americans who are not covered by retirement plans at work, which, at least for now, is the foundation upon which the American retirement system is built. According to a recent study by AARP, nearly half of private sector employees from 18 to 64, or 57 million people, do not have the option to save for retirement at work. That’s about 48% of the workforce, according to AARP.

As always, if you have questions regarding retirement of other planning, you should consult with your financial adviser or your accountant.

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