SECURE 2.0 Brings Significant Changes to Retirement Rules
As Americans headed into the Christmas holidays, Congress put a bow on its $1.7 trillion spending bill and sent it to President Biden, who signed it into law. The spending bill included the long-awaited SECURE 2.0 Act, or Setting Every Community Up for Retirement Enhancement Act of 2022. This significant piece of legislation, designed to improve retirement security for Americans, includes a number of provisions that could affect the amount you can save for retirement now or in the future. Here are some of the highlights:
RMD changes
Starting this year, the SECURE 2.0 Act delays the first required minimum distribution (RMD) from tax-advantaged retirement accounts, such as a traditional IRA, SEP IRA, SIMPLE IRA, or an employer-sponsored retirement plan, from age 72 to 73. Then, in 2033, the RMD age will increase again, to 75.
While RMDs are not required for Roth IRAs under current law until the owner of the Roth IRA dies, pre-death distributions are required for Roth money inside an employer’s 401(k) plan. Under SECURE 2.0, Section 325 eliminates the pre-death distribution requirement effective for taxable years beginning after Dec. 31, 2023, but does not apply to required distributions from years before Jan. 1, 2024, that are allowed to be paid on or after that date.
As part of the RMD changes, the SECURE 2.0 Act, effective this year, also reduces the penalty for failing to take RMDs from 50% to 25%, or 10% if the error is corrected in a timely manner.
Catch-ups
SECURE 2.0 will make it easier for workers who haven’t saved enough for retirement to catch up. Beginning in 2025, people ranging in age from 60 to 63 who participate in employer-sponsored retirement plans will see their maximum catch-up contribution limit increase to $10,000 per year or 50% more than the regular catch-up amount, whichever is greater.
IRA catch-ups will change as well. Starting in 2024, IRA catch-ups will be indexed to inflation. Under current law, these catch-ups are limited to $1,000 (not indexed) for those aged 50 and over.
Section 603 of the SECURE 2.0 Act indicates that certain retirement plan catch-up contributions will be required to be Roth contributions, with Roth IRA tax treatment. This only applies to people with wages from their current employer greater than $145,000 in the previous year (this will be adjusted for inflation in future years). If you held two jobs in a year, and made $110,000 from the first and $90,000 from the second, you would not be subject to the Roth IRA tax treatment, even if the combined salary total is greater than $145,000. Self-employed individuals would still be able to make pre-tax catch-up contributions, even if their income is higher than $145,000 for the previous year.
Matching contributions for student loan payments
According to the Center for Retirement Research at Boston College, Bachelor’s degree-holders with student loans have significantly lower retirement assets at age 30 than those without loans. To assist people with student loans in saving for retirement, the SECURE 2.0 Act will enable employers to make a special kind of matching contribution starting in 2024. Employers can match a percentage of what an employee is paying for student loans and apply the amount to the employee’s retirement plan.
Emergency savings
It’s no secret that many Americans would struggle to pay for a surprise $400 expense. The SECURE 2.0 Act addresses this by giving employers the option of auto-enrolling “non-highly compensated employees” into emergency savings accounts up to $2,500. Once the employee reaches the maximum contribution of up to $2,500, any additional funds would move to the employee’s retirement account.
529 to Roth IRA Transfers
The SECURE 2.0 Act will allow some individuals, starting in 2024, to move money from their 529 plans directly into a Roth IRA. However, special conditions apply:
- The 529 plan must have been maintained for at least 15 years;
- The Roth IRA earmarked to receive the funds must be in the name of the 529 plan beneficiary;
- Any 529 plan contributions made within the last five years cannot be moved to a Roth IRA, and neither can the earnings on those contributions;
- During an individual’s lifetime, the maximum amount that can be moved from a 529 plan to a Roth IRA is $35,000; and
- On an annual basis, transfers from a 529 plan to a Roth IRA are limited to the difference between the transfer amount minus any regular traditional or Roth IRA contributions for the year.
The SECURE 2.0 Act also includes provisions that aim to improve access to retirement plans for part-time workers and gig economy workers. For example, the act allows part-time workers who work at least 500 hours per year to be eligible for employer-sponsored retirement plans, and it allows gig economy workers to participate in multiple employer plans. This can be a significant benefit for workers who may not have access to traditional employer-sponsored retirement plans, as it can help to ensure that they have the opportunity to save for retirement.
In addition to these provisions, the SECURE 2.0 Act also includes a number of arrangements that aim to improve the security of retirement plans. For example, the act requires plan sponsors to provide participants with clear and concise information about their plan and their options for withdrawing funds, and it requires plans to offer in-plan annuities as an investment option. These provisions can help ensure that retirement plan participants have the information and tools they need to make informed decisions about their retirement savings.
The SECURE 2.0 Act is a lengthy and complex piece of legislation, and the highlights cited here only scratch the surface – other provisions in the act may also apply to your situation. Your financial advisor can help you stay current with issues related to the act’s implementation, and work with you to evaluate how the act may affect your retirement planning. With careful planning and a sound financial strategy, you can take advantage of the opportunities presented by the SECURE 2.0 Act to help secure your financial future.
Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant.
Anne M. Mank
Director of Financial Planning