On 12/30/22 the Secure 2.0 Act was signed into law with the intention to strengthen the retirement system and help more Americans save and plan for retirement. There are hundreds of provisions inside the legislation and below are the provisions that will most likely impact you, but know there are quite a bit more provisions in the law. Additionally, you will want to check in periodically for updates as some of these changes may require additional clarification or will change in the coming months. A lot of institutions will need to make rapid changes to their systems and processes in order to accommodate these wide sweeping changes.
New Retirement Saving Rules
- Automatic Enrollment. All businesses adopting a new 401(k) or 403(b) plan will be required to automatically enroll all eligible employees in 2025. The starting employee contribution rate will be set to 3% and employees can opt out or change their saving rate. They will also be required to automatically increase their savings rate by 1% every year until it is at least 10%, but not exceeding 15%.
- Emergency Savings. Employers can now help with emergency fund savings in two different ways. First, the employer can offer a $1,000 withdrawal per year from the retirement account penalty free to help in the event of an emergency. Another option is that employers can offer emergency savings as part of their retirement plan, where the employee can contribute up to 3% or $2,500 of their salary to their designated emergency fund and their contribution will still qualify for a match to the retirement savings by the employer. The money in the Emergency Fund can be distributed tax-free and without penalty.
In addition to this provision, victims of domestic abuse will also be able to withdraw up to $10,000 or 50% of the vested plan balance (whichever is less) within 1 year of the abuse incident without penalty. The distribution will need to be repaid in 3 years.
- Student Loan Debt Matching. Employers can offer a matching contribution to your retirement account if you are making student loan payments starting in 2024. That way you aren’t neglecting your retirement savings as you work towards paying off your student debt.
- 529 Plan to Roth IRA Contributions. Starting in 2024, you can roll over a 529 Education Savings Plan into a Roth IRA if the 529 account has been opened for 15 years. Certain conditions apply and the annual limit you can rollover is limited to the annual Roth IRA contribution limit and a total lifetime limit of $35,000. This is a great opportunity if you have a 529 savings account and the designated beneficiaries decided not to use the account for higher education and can instead kick-start their retirement savings.
- Auto Portability For Employer Retirement Accounts. Employers can offer automatic portability of retirement accounts, transferring the balance of the retirement account to a new plan when an employee changes jobs. This change will help decrease the number of people that will cash out a low-balance retirement plan and instead continue to contribute and grow their retirement savings.
Changes to the Roth IRA
- Employer Matching Contributions. Employers will be able to offer the option of an employee to receive their match contribution to a Roth account if offered. In addition, Roth IRA matching contributions can now be offered in SIMPLE and SEP IRA retirement plans. If you elect for your employer’s matching contributions to go to a Roth account, the contribution will be added to your ordinary income and increase your AGI.
- Required Minimum Distribution (RMD) for Roth accounts. Roth accounts sponsored by an employer retirement plan will no longer be required to take Required Minimum Distributions in retirement. Previously, Roth retirement plans still needed to take RMDs even though the Roth IRA account did not.
Updates for Near-Retirees & Retirees
- Required Minimum Distribution RMD changes. The age at which RMDs are required to begin has been changed to 73 in 2023 and will increase to 75 in 2033. In addition, anyone who would have to start taking RMDs in 2023 due to their age will be exempt. If you have already turned 72 and are taking RMDs, you will still continue to take those distributions. Talk to your financial planner to see how this change might affect your tax and retirement saving strategies.
The penalty for missing an RMD was reduced to 25% from 50%. If the missed RMD is corrected within the allowed correction window, the penalty is reduced to 10% and can be reduced to 0% under certain conditions.
- Higher Catch-Up Contributions. Starting in 2025 those who are between the ages of 60-63 will be able to make catch-up contributions to their workplace retirement plans of up to $10,000 annually. However, if you are earning more than $145,000 a year, your additional catch-up can only be made as a Roth contribution. If your employer does not offer a Roth option for retirement savings, you will not be eligible for this catch-up contribution.
- Qualified Charitable Distribution (QCD). Starting in 2023, the rules around a QCD have expanded. You can now use $50,000 of your $100,000 annual QCD limit to donate to a charitable remainder unit trust, annuity trust, or charitable gift annuity rather than directly to the charity itself. This is a one-time opportunity and can expand your options for eligible charities. The charitable donation must still come directly from an IRA account.
You can review this flow chart for additional provisions to see if any of them apply to you.
It’s important to note that there were a lot of details to the Secure 2.0 Act and a lot of changes will need some time in order for payroll services, retirement plans, and custodians to adjust and adapt. If there are changes that you are unsure about, consider reaching out to your financial planner to determine what you need to do to optimize your retirement and tax planning.