The SECURE 2.0 Act passed in 2022 is now law for 2023 and beyond. The legislation provides a series of benefits to help strengthen the American retirement system and encourage more Americans to save for retirement.
There is a massive difference between what Americans think they need in retirement versus what they've actually saved in retirement. The SECURE 2.0 Act aims to narrow this gap so that more Americans can enjoy a financially sound retirement.
The law builds on earlier legislation that increased the age at which retirees must take required minimum distributions (RMDs). The SECURE 2.0 Act also allows workplace saving plans to offer annuities, which was heavily debated for years.
The main changes from the SECURE 2.0 Act is that it increases the age at which retirees must begin taking RMDs from IRA and 401(k) accounts. This is not something you need to worry about if you're middle-aged or younger.
The SECURE 2.0 Act also increases the size of catch-up contributions for older workers. The whole goal of the legislation is to get people to save more money for retirement.
Main Retirement Benefits And Changes Under The SECURE 2.0 Act
Let's go through nine main retirement benefits and changes under the SECURE 2.0 Act. We'll talk about retirement changes most pertinent from older workers to younger works.
These five retirement benefits and changes are most pertinent older workers near retirement age (60+).
1. An increase in the Required Minimum Distribution Age
The age at which owners of retirement accounts must start taking RMDs will increase to 73, starting January 1, 2023. The previous RMD age was 72. Therefore, individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts. SECURE 2.0 also pushes the age at which RMDs must start to 75 starting in 2033.
Starting in 2023, the penalty for failing to take an RMD will decrease to 25% of the RMD amount not taken, from 50% currently. The penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
Additionally, Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024. Individual Roth IRA accounts are already exempt from RMD requirements.
Beginning immediately, for in-plan annuity payments that exceed the participant's RMD amount, the excess annuity payment can be applied to the year's RMD.
2. Higher catch-up contributions.
Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. (The catch-up amount for people age 50 and older in 2023 is currently $7,500.)
Starting in 2024, if you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.
IRAs currently have a $1,000 catch-up contribution limit for people age 50 and over. Starting in 2024, that limit will be indexed to inflation. In other words, the limit could increase every year, based on federally determined cost-of-living increases.
3. Matching for Roth accounts.
Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts. Check with your employer to see if this is being offered.
Previously, matching in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, after which earnings can grow tax-free.
Again, unlike individual Roth IRAs you can open up with an independent online brokerage account like Fidelity, RMDs from an employer-sponsored plan are required for Roth accounts until tax year 2024.
4. Qualified charitable distributions (QCDs).
Beginning in 2023, people who are age 70½ and older may elect as part of their QCD limit a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity.
This is an expansion of the type of charity, or charities, that can receive a QCD. This amount counts toward the annual RMD, if applicable. Note, for gifts to count, they must come directly from your IRA by the end of the calendar year. QCDs cannot be made to all charities.
5. Other changes for annuities.
Qualified longevity annuity contracts (QLACs) are getting a boost. QLACs are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that begin payments on or before age 85.
The dollar limitation for premiums increases to $200,000 from $145,000 starting January 1, 2023. The law also eliminates a previous requirement that limited premiums to 25% of an individual’s retirement account balance.
For People Still Years Away From Retirement
Here are other retirement changes under the SECURE 2.0 Act for those still years away from retirement. We're talking folks usually under 50.
6. Automatic enrollment and automatic plan portability.
The legislation requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees, starting at a contribution rate of at least 3%, starting in 2025. This is huge as it forces businesses to participate, which in turn, forces employees to participate.
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.
Instead of cashing out your 401(k), roll it over into a IRA. Then start contributing to a new 401(k) at your new employer.
7. Emergency savings.
Defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. 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.
Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses.
8. Student loan debt.
Starting in 2024, employers will be able to “match” employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.
This is a particularly attractive employer benefit given millions of student loans will resume payments starting in October 2023 after a three-year hiatus due to the pandemic. The more financial benefits an employer can offer, the easier it will be to attract and retain employees.
9. 529 Plans – Roll Over To A Roth IRA
After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit.
For those of you who have saved too much in a 529 or are now thinking about state school, community college, or no college, this new SECURE 2.0 benefit is great.
Save As Much As You Possibly Can For Retirement
The SECURE 2.0 Act is a positive legislative step to encourage more Americans to save for retirement. However, employee participation rates for tax-advantaged retirement accounts (401(k), 403(b, etc) is still woefully low. For employees who do contribute to tax-advantaged retirement accounts, employees are simply not contributing enough.
Take a look at this eye-opening survey conducted in 2023. It highlights how much U.S. adults think they need in retirement versus how much they've actually saved. The amounts are $1.3 million needed versus $89.3K actually saved. This $1.2+ million retirement savings gap clearly needs to be narrowed.
The SECURE 2.0 Act will help. However, it's up to all of us to save more if we want a stable retirement lifestyle with minimal financial worry.
As always, consult your financial advisor or tax professional to understand how SECURE 2.0 changes apply to you.
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