Secure 2.0 Act: Changing the way you save for retirement

SECURE 2.0 Act was signed into law in late 2022, delivering dozens of new retirement-related provisions. These changes build on the original SECURE Act of 2019, which altered the rules around how you can save and withdraw money from your retirement accounts. “Secure 2.0 Act offers comprehensive changes to address the retirement income gap for individuals,” says Sarah Darr, head of financial planning at U.S. Bank Wealth Management. “There are very few people who won’t be affected by these changes.”

The lack of retirement preparedness among Americans has drawn the attention of Washington policymakers in recent years. According to one study, by 2050, the U.S. will face a $137 trillion retirement income gap (the difference between what savers should have and what they’ve actually saved). If projections hold, retirees in six major economies (including the U.S.) would outlive their savings by an average of eight to 20 years.¹ “These new SECURE 2.0 changes can empower individuals to reach savings goals and provide more flexibility when retiring,” says Darr.

Some provisions of the SECURE 2.0 Act went into effect in 2023. Other SECURE 2.0 Act changes will begin over the next few years. The effective dates are highlighted with each provision outlined below. 

SECURE 2.0 Act 2023 summary: Key provisions

Raising the starting age for RMDs.

The threshold age that determines when individuals must begin taking required minimum distributions (RMDs) from traditional IRAs and employer sponsored retirement plans increased from 72 to 73. As a result, individuals now can choose to delay taking their first RMD until April 1 of the year following the year in which they reach age 73. From that point on, RMDs must be received each year by December 31.

In addition, the penalty for failing to take RMDs on a timely basis is now 25% (previously 50%). “Extending RMD dates provides individuals more flexibility for dollars to grow tax deferred,” says Darr. "And decreasing the RMD penalty makes it more reasonable should mistakes occur.”

It’s important to note that delaying RMDs means the amount of withdrawals required in later years may be larger, which could move you into a higher tax bracket. Additionally, since your RMD amount is calculated by dividing your account balance on December 31 by your life expectancy, a year with strong market performance may also move you into a higher tax bracket.

You can minimize the tax impact of the SECURE Act 2.0 RMDs by donating an RMD from a traditional IRA directly to a qualified charitable organization (up to $105,000 in 2024). This is known as a qualified charitable distribution (QCD) and it’s available to individuals 70 ½ or older. “QCDs are often an overlooked planning opportunity for individuals to manage gifts and reduce taxes,” says Darr.

Another strategy to consider is a tax-diversified portfolio that includes taxable (traditional brokerage accounts) and tax free accounts (Roth IRAs), which are exempt from RMDs.

Increase in employer sponsored retirement plan catch-up contributions.

Catch-up contributions allow people age 50 and older to set aside additional dollars beyond the standard maximum contributions to employer sponsored retirement plans (such as 401(k)s) and IRAs. Effective in 2023 and 2024, the maximum additional catch-up contribution to an employer plan increased to $7,500 per year.

“The ability to put more income to work in a tax-advantaged retirement account not only boosts retirement savings,” says Darr, “but also reduces current taxable income.” As a result, catch-up contributions may help you avoid moving into a higher tax bracket by deferring a larger chunk of your salary.

Changes to employer-sponsored Roth 401(k) plans.

If you have a Roth 401(k) plan through your employer, and if the employer plan is updated to allow it, you can now choose to have employer matching contributions directed to your account. These contributions are considered taxable income in the year of the contribution, but future growth and withdrawals are tax free.

In addition, employers can now elect to add Roth contributions to accounts (after-tax contributions) for SIMPLE IRA and SEP IRA retirement plans.

More penalty-free early withdrawals.

There’s generally a 10% penalty for distributions taken from a retirement account prior to reaching age 59-1/2. SECURE 2.0 Act expands the circumstances where penalty-free “hardship” withdrawals could occur if the employer elects to provide them in the plan:

• Waived for those certified by a physician as having a terminal illness or condition that can reasonably result in death in 84 months or less (withdrawals of any amount).
• Waived for individuals in federally declared natural disaster areas (withdrawals up to $22,000).

New rules for QCDs.

As stated previously, individuals age 70-1/2 and older can direct up to $100,000 in distributions per year from a traditional IRA to qualified 501(c)(3) charitable organizations. You now have a one-time opportunity to also use a QCD to fund a Charitable Remainder Unit Trust (CRUT), Charitable Remainder Annuity Trust (CRAT) or a Charitable Gift Annuity (CGA).

Up to $50,000 (indexed for inflation) can be directed using this one-time distribution option. If a distribution is directed to a CRUT or CRAT, it must be the only form of funding for that trust.

New limits for Qualified Longevity Annuity Contracts (QLACs).

The maximum amount that can be used to purchase QLACs is $200,000 (up from $145,000). In addition, the “25% of account balance” limitation is eliminated.

SECURE 2.0 Act 2024 summary: Key provisions

Increase in traditional and Roth IRA catch-up contributions.

An annual cost-of-living increase to the $1,000 limit may be indexed to inflation in future years; however, the catch-up contribution limit remains $1,000 for 2024.

More penalty free withdrawals.

Additional exceptions for penalty-free withdrawals from retirement accounts become effective in 2024, if the employer elects to add them to their plan:

• Waived for domestic abuse victims within the past 12 months (withdrawals up to the lesser of $10,000 or 50% of the vested balance of the account). All or a portion must be repaid within three years.
• Waived for financial emergencies (one withdrawal per year up to $1,000). Certain criteria must be met before subsequent withdrawals can be made.

QCD inflation increases.

The maximum contribution amount to QCDs will increase based on the inflation rate. The maximum amount for 2024 is $105,000 (up from $100,000).

Retirement plan contributions for those with student loan debts.

Employers can elect to make contributions to retirement plans on behalf of employees who are still repaying student loans, even if those employees do not make retirement plan contributions. Employer retirement plan contributions can match the amounts of student loan debt repaid by the individual worker in a given year.

“This creates an excellent opportunity for employers to offer an incentive to attract and retain employees,” says Darr. She notes that it could prove to be an effective way to kick-start a retirement savings plan for younger workers who are burdened with college loans.

Rollovers of 529 plan balances to Roth IRAs.

You can now roll up to $35,000 of leftover funds in a 529 education savings plan into a Roth IRA. Balances above $35,000 can be taken as a non-qualified distribution, but the earnings portion of the distribution is subject to income tax and a 10% penalty.

The $35,000 threshold is a lifetime limit subject to a few restrictions:

• The 529 account must have been in place for at least 15 years.
• Funds must move directly into a Roth IRA for the same individual who was the beneficiary of the 529 plan.
• Any 529 plan contributions made in the previous five years, and any earnings attributed to those contributions, are not eligible to be rolled into a Roth IRA.
• The amount moved into a Roth IRA in a given year must be within annual IRA contribution limits ($7, 000 in 2024, plus an additional $1,000 for those age 50 and older).  

“This reduces the fear of overfunding a 529 plan by allowing excess funds to be used for other needs without penalty,” says Darr.

Roth 401(k) plans.

Similar to Roth IRAs, Roth 401(k)s are no longer subject to RMDs.

SECURE 2.0 Act 2025 summary: Key provisions

Increase in employer sponsored plan catch up contributions.

Beginning in 2025, you will be able to add $10,000 more per year above the standard limit if you’re ages 60 to 63. That amount will be indexed for inflation.

Auto enrollment in 401(k) plans.

Employers currently have an option to initiate “automatic enrollment” of employees into an employer sponsored retirement plan. When this occurs, employees automatically participate in the plan unless they choose not to. Effective in 2025, for new plans established after December 31, 2022, the process reverses, and automatic enrollment is required of most major employers.

The amount automatically deferred each year will range from 3% to 10% of an individual’s income. Employees who don’t wish to participate in the plan can choose to opt out. Businesses with 10 or fewer workers and companies in business for less than three years are among those excluded from the mandate.

Also effective in 2025, part-time employees will qualify to participate in a plan once they’ve worked at least 500 hours for two consecutive years. Under existing law, part-time workers must meet the 500-hour threshold for three consecutive years.

“Auto enrollment has the potential to be a real game-changer for participation in workplace plans,” says Darr. “As it stands, too few people make contributions to qualified workplace retirement plans. This will encourage people to save more.”

SECURE 2.0 Act 2026 summary: Key provisions

Change to employer plan catch up contributions.

Beginning in 2026, catch-up contributions in workplace retirement plans must go into a Roth account and made on an after-tax basis, except for individuals who earn less than $145,000.

Penalty free withdrawals for LTC contracts.

Effective in 2026, withdrawals of up to $2,500 per year from an employer sponsored retirement plan can be used to pay premiums on qualified long-term care contracts.

SECURE 2.0 Act 2027 summary: Key provisions

Establishment of a Saver’s Match.

The current “Saver’s Credit” program allows those meeting lower income thresholds to claim a tax credit for contributions made to workplace savings plan or IRA. Effective in 2027, the credit is being replaced by a “Saver’s Match.”

The match will equal up to 50% of the first $2,000 contributed by an individual to a retirement account each year (or up to $1,000). This will be a federal matching contribution deposited into the saver’s traditional retirement account.

SECURE 2.0 Act 2033 summary: Key provisions

RMD age increase.

The threshold age for RMDs will increase to 75.

Consider the effect of SECURE 2.0 Act on your own retirement plan

The SECURE 2.0 Act will change the rules around retirement savings and retirement plan distributions over the next few years. “These provisions can be complex, so you may want to connect with a financial professional to understand how it impacts your retirement situation,” suggests Darr.

Review the details of your employer sponsored retirement plan to see if your employer has elected to add any of the optional provisions of the Secure 2.0 Act. If any apply to your situation, a financial professional can help you review your current strategy and discuss which adjustments may be most beneficial. You may also wish to consult with your tax advisor to understand the potential tax ramifications of any decisions you make.

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