Congress has upended retirement plans again, and the changes should benefit a wide range of Americans who are saving for their golden years thanks to IRA or employer plans such as 401(k)s.
The SECURE 2.0 Act came into effect in the final days of 2022, and the new rules offer relief to retirement savers, small businesses and many more. In fact, the changes are so significant that many of them won’t officially begin until 2024 or later. The new law is a radical sequel to SECURE Act of 2019which itself has disrupted the financing and planning of pensions.
It should be noted that although the new law allows the following features, in many cases employers must configure their retirement plans such as 401(k) to enable these features. So you’ll want to check with your employer if they plan to offer the new features and when.
Here are ten of the most important changes in SECURE Act 2.0 and what you need to know.
1. The age of required minimum distributions is increasing
The SECURE Act 2.0 changes the age at which savers must begin taking minimum required distributions (RMD) pension plans, not once but twice. The age to start taking RMDs has now risen to 73, from 2023, from 72. Then, from January 1, 2033, the age to start taking RMDs is 75 years old. The law applies to 401(k), 403(b) plans, and IRAs, among others.
“Probably the most significant change in SECURE Act 2.0 is the change in RMDs,” says Brian McGraw, CFP and senior wealth advisor at Hightower Wealth Advisors in St. Louis. “It’s one that retirees and future retirees want to do.”
Due to changes in the law, no one will need to start taking their RMD in 2023. But if you have already started taking your RMD, you are not off the hook to take it in 2023.
“People who are already taking RMDs still need to take them, but those who haven’t started don’t need to start for another year,” says McGraw.
Impact on retirement savers: The extra time could allow you to accumulate your money in a tax-efficient account even longer, which means you could have more money when you withdraw it.
2. No more RMD on Roth employer sponsored accounts
Starting in 2024, employer-sponsored Roth accounts, such as the Roth 401(k), will no longer require minimum distributions. This change aligns the withdrawal rules for employer-sponsored plans with those of the Roth IRA, which has no RMD. Previously, many advisors suggested clients transfer Roth 401(k) accounts to a Roth IRA to avoid RMDs.
Impact on retirement savers: This change simplifies the withdrawal rules for the Roth 401(k) and helpfully aligns them with those of the Roth IRA.
3. Reduced penalties for missing RMDs
If you do not meet your RMD, you will be hit with a penalty. Previously, this penalty was 50% of the amount you did not withdraw. The new law reduces this penalty to 25%. If you miss an RMD from an IRA, you may be able to reduce this penalty to 10% if you correct the deficiency in a timely manner and refile your taxes.
Impact on retirement savers: The lower penalty means more money can stay in your pocket, although it’s quite easy to avoid this penalty in the first place.
4. Automatic enrollment and escalation in retirement plans
Beginning in 2025, newly created 401(k) and 403(b) plans will automatically enroll eligible employees with a minimum contribution of at least 3%. Plans must include an auto-escalation feature that increases the savings rate by 1% per year, up to a maximum of 10 or 15%, depending on the plan. However, the employee can withdraw from the plan.
“Perhaps the biggest hurdle employers face in helping their employees invest for retirement is simply enrolling people in retirement plans,” says Edward Gottfried, Improvement at Work’s product manager.
Impact on retirement savers: “Auto-Enrollment and Auto-Raise not only increase retirement savings, but also contribute to better financial outcomes for employees: Employees who start Auto-Enrollment more frequently contribute more than the amount they were entered automatically and then decrease that amount,” says Gottfried.
5. Larger catch-up contributions
“One of the most important things for savers is larger catch-up contributions,” McGraw says. “If you are between [age] 60 and 63, you can contribute up to $10,000 as a catch-up contribution.
Currently, the law allows workers age 50 and older to make catch-up contributions of $7,500 each year to 401(k) plans, and that will continue. However, those in the special age group will be able to contribute up to the $10,000 level. The new provision will come into force on January 1, 2025.
In addition, the maximum catch-up contribution will be indexed to inflation, allowing workers to save more as inflation raises overall prices.
Impact on retirement savers: Older workers will be able to save more in their employer-sponsored retirement plans.
6. Catch-up contributions for high earners must be paid to a Roth
If you earned a salary of $145,000 or more in the previous calendar year, any catch-up contributions at age 50 or over to an employer-sponsored plan must be paid into a Roth account. If you have earned less than this amount, you will not be required to contribute to the Roth version but you can choose to deposit it into the Roth version or a traditional (pre-tax) version of the account, for example, a Traditional 401(k). This income threshold will be adjusted for inflation in the future.
Impact on retirement savers: While it helps to save a lot of money, the government wants to limit the amount you can save in tax-deductible retirement accounts. The advantage is that more money will be stored in a Roth account after tax, which means he is tax-free upon retirement.
7. Employer matching can be treated as a Roth contribution
Previously, everything matching employer contributions were to be treated as a pre-tax contribution, meaning they went into a traditional 401(k) account or equivalent. The new law changes that, allowing matching contributions to also go into a Roth version of the account, if desired. However, unlike pre-tax matching funds, matching amounts paid into a Roth account are taxable.
Impact on retirement savers: Workers have an even greater ability to accumulate funds in Roth accounts, allowing you to avoid taxes when it comes time to withdraw the funds in retirement.
8. Student loan repayments qualify for matching contributions
The new law allows student loan repayments to act as a salary deferral that can be matched by employer matching contributions. In effect, borrowers can repay their student loans while receiving matching employer contributions for retirement. However, the provision will not come into effect until 2024.
“In a recent survey of U.S. employees, we found that 67% of savers said their student debt had impacted their ability to save for retirement,” Gottfried says. “By allowing employers to offer 401(k) matching on the dollars their employees use to repay their loans, we’re going to see a massive increase in the number of savers and a fantastic step forward in preparing those savers for retirement.”
However, remember that employer-sponsored retirement plans such as 401(k) have an annual employee contribution limit ($22,500 for 2023), capping the total potential benefit.
“This layout seems like a win-win situation,” McGraw says.
Impact on retirement savers: Those with student loans can still take advantage of the “free” matching funds enjoyed by everyone who contributes to an employer pension plan.
9. 529 plans can be rolled over into Roth IRAs
One of the biggest drawbacks of saving in a 529 education savings plan was what to do with the funds if they are not used. The SECURE Act 2.0 allows this money to be transferred into a Roth IRA. But there are some fine print: Money can be transferred into a Roth IRA for the beneficiary after the account has been open for at least 15 years, and is limited to the maximum annual Roth contribution. Additionally, there is a lifetime limit of $35,000 on the rollover amount.
However, the provision does not come into effect until 2024, giving authorities time to iron out the fine points of the law. “Congress still needs to clarify a lot of things,” says McGraw, adding that this change “creates more questions than answers at this point.”
Impact on retirement savers: This change can provide a lot of benefits to those who hold 529 plans with unused money.
10. SEP IRAs and SIMPLE IRAs now have Roth options
Small employers can use SEP IRA or SINGLE IRAs to help their employees finance their retirement. These plans are even better: the new law allows employers to offer Roth versions of these plans, giving employees the ability to grow and withdraw their wealth tax-free into a Roth account.
The new functionality for SEP IRAs and SIMPLE IRAs is available in 2023, although plan providers will need some time to update their systems to allow for this.
Impact on retirement savers: This is good news for small business employees who use these plans, allowing them to benefit from the power of a Roth account.
At the end of the line
This list of changes is only a starting point for what is contained in the new law. Lawmakers have yet to determine how certain provisions will actually be enacted and determine their specifics. Thus, some features of the new law will not come into force until next year or even later. But even without the fine print, retirement savers can still start preparing for the changes.