Commonly referred to as SECURE Act 2.0, a new bill that follows the Setting Every Community Up for Retirement Enhancement Act of 2019 has officially been signed by President Biden. Let’s go over the biggest changes that have already taken effect as well as ones that will roll out over the course of the next decade.
1. Pushed Back RMDs [1,2]
As of the beginning of 2023, the age at which retirees must begin taking required minimum distributions from their qualified retirement accounts is 73. Previously it was 72, meaning that retirees will now have an extra year to plan for the distribution of their accounts or enact a strategy to minimize taxes on tax-deferred accounts. Furthermore, the RMD age will move back to 75 in 2033; however, in all cases, if you have already begun taking RMDs, you must continue to take them.
2. Lowered Penalties for RMD Failures [2]
Prior to SECURE Act 2.0, failure to take required minimum distributions correctly would cause you to owe a 50% penalty on top of the amount not withdrawn, a hefty price on what may be your most precious assets in retirement. Now, the penalty has been reduced to just 25% with the potential to drop to 10% if corrected in a timely manner, which CPA and financial industry expert Ed Slott says typically means within a two-year timeframe.
3. Increased Catch-Up Contributions [1,3]
For 2023, those over the age of 50 can make catch-up contributions of $7,500 to employer-sponsored plans like 401(k)s, and catch-up contributions of $1,000 can be made to traditional and Roth IRAs. Beginning in 2025, those age 60 to 63 will be able to make catch-up contributions of $10,000 to employer-sponsored plans, and the limit will be indexed to inflation thereafter. Additionally, catch-up limits for both traditional and Roth IRAs will be indexed to inflation beginning in 2024. Ideally, this should give those nearing retirement a chance to grow their accounts as they close in on that important stage of their lives.
4. Increased Options for Employer Matches [1]
Prior to SECURE Act 2.0 even if employers offered a Roth option for their 401(k) or similar plan, the employer match amount was required to be made on a pre-tax basis to a traditional account. The SECURE Act 2.0 allows employers to offer post-tax matches to Roth accounts, meaning employees pay taxes now but the match amounts can grow and distribute tax-free later. Additionally, beginning in 2024, employers may match student loan payments with contributions into retirement accounts.
5. Auto-Enrollment into Employer-Sponsored Plans [1]
Enrollment into new employer-sponsored plans, such as 401(k) and 403(b) plans, will be automatic beginning in 2025. Upon hiring or upon the inception of the 401(k) plan, employees will automatically be added at a rate of at least 3% but no higher than 10%. Ideally, this could help people save more for retirement. Employees will still be able to opt out.
6. New Options for 529 Plans [4]
In 2024, unused funds from 529 plans, which are tax-advantaged accounts traditionally used by grandparents and parents to help a beneficiary save for college, are now able to be rolled over into a Roth IRA. There are many questions about this new provision, such as how beneficiaries may or may not be changed. There is $35,000 limit on total funds able to be converted and the 529 account has to be established for at least 15 years to be eligible for rollovers.
7. Increased Flexibility in Annuities [1,5]
SECURE Act 2.0 offers a bit more flexibility in the purchase of qualified longevity annuity contracts, or QLACs, with funds held in qualified retirement accounts. Previous limits held premiums to 25% of an account’s balance and capped them at $145,000, but SECURE Act 2.0 has eliminated the 25% rule and increased the total cap to $200,000.
