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The December 29, 2022, signing of the omnibus spending bill included the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0. Businesses and their workers can now take advantage of more incentives for retirement plans.
SECURE Act 2.0 is the second phase of Congress's response to the retirement crisis in the United States. The first phase, the SECURE Act, was signed into law on December 27, 2019.
SECURE 2.0 builds on previous initiatives to assist Americans in achieving retirement security and financial well-being.
SECURE 2.0 focuses on changes that affect your retirement savings in the next year or two. Here are 11 changes that you need to understand:
1. RMD age delay
The law says you must take the minimum distributions (RMDs) from your retirement plan when you are 72. Beginning on January 1, 2023, SECURE 2.0 raised the minimum age for distribution to 73. This is a significant change for those retiring this year; in 10 years, the RMD age will go up to 75.
2. RMDs and Roth 401(k)s
The Act eliminated RMDs for qualified employer Roth plan accounts beginning next year, in 2024. Before, the rules for Roth 401(k) accounts in employer plans differed from those for Roth IRAs.
3. 401(k) financial incentives
Secure 2.0 lets your employer offer small financial incentives, like low-dollar gift cards, to encourage you to join its retirement plan. This rule will apply to plan years that start after December 2022.
4. Emergency expense distributions from 401(k)s and 403(b)s
Starting in 2024, you can get an early "emergency" distribution from your retirement account to pay for unexpected or immediate financial needs.
An emergency distribution of up to $1,000 can be taken only once a year, but it won't be subject to the extra 10% tax that is usually added to early withdrawals. But you need to pay back the money within a specific time to get more emergency cash during the subsequent three years.
The Act allows people with 403(b) plans to take out cash for other reasons. The rules for getting money out of 403(b) and 401(k) plans differ. SECURE 2.0 makes those rules the same.
Under SECURE 2.0, people abused at home can take out small amounts of money from their retirement plans without paying the penalty.
5. Automatic enrollment in a 401(k)
The act makes automatic enrollment in retirement plans more widespread starting in 2025. More people join 401(k) plans with automatic enrollment. With a few exceptions for small businesses, the act says that eligible participants in 401(k) and 403(b) plans must be automatically enrolled. They can opt-out if they don't want to be in the plan.
6. Catch-up contribution limit
If you are 50 or older, you can make catch-up contributions to your retirement plan. But there are certain limits to how much you can contribute.
Starting in 2025, SECURE 2.0 raises these limit to 50% more than the regular catch-up amount for people 60, 61, 62, or 63 years old. These amounts will be adjusted for inflation after 2025. Also, the act changes how eligible workers with incomes over $145,000 can make catch-up contributions starting in 2024.
7. Changes to 529 plans and Roth IRAs
Some people can roll over a 529 plan they've had for at least 15 years into a Roth IRA starting in 2024. However, many rules must be followed, such as the Roth IRA account has to be in the name of the 529 plan beneficiary. The amount that can be rolled into a Roth IRA in a lifetime is limited to $35,000. The amount that can be rolled into a Roth IRA each year must be less than the annual contribution limit.
8. Changes to saver's match and saver's credit
The act replaces the nonrefundable saver's credit for specific IRA and retirement plan contributions made after 2027 with a federal matching contribution put into your IRA or retirement plan.
The so-called "saver's match" will be 50% of contributions to an IRA or retirement plan up to $2,000 per person. But there will be some income limits and phase outs.
9. Student loans and 401(k) plans
Under the act, your employer can match what you put into your retirement plan based on how much you pay toward your student loans. This is meant to help people save for retirement even if they have a lot of student loan debt. This will start in 2024.
10. Lost and found retirement benefits
The act makes it possible to create a database that can be searched to help people find their lost retirement benefits. The "lost and found" retirement savings will be kept at the Department of Labor and will be made available in the next two years.
11. Part-time workers and retirement plans
Many more parts of the act affect retirement savings accounts. Some of these rules cover how part-time workers can join their employers' retirement plans, how small businesses can get tax breaks, and how people can put money into SIMPLE and SEP plans. Other changes deal with issues related to owning stocks and savings bonds.
Conclusion
Even though many of the SECURE 2.0 retirement plan provisions are phased in gradually, some, like the new federal "saver's match" and mandatory paper benefits statements, don't go into effect until 2026. Some crucial provisions need to be taken care of right away.
Some of the changes will help small businesses the most. All workplace retirement plans should be checked for any changes to be made and how they work. Many new rules need more explanation, but in the meantime, employers should look over their plan documents and operations to see if any changes need to be made.
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a Principal Attorney.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.