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SECURE Act 2.0: How the New Rules Affect Your Retirement

Putting money aside for retirement can be daunting, especially when there are bills to catch up on. Over the years, retirement tax incentives have not been very effective in encouraging people to enthusiastically save for retirement. This is set to change, thanks to the SECURE 2.0 Act, which introduces a set of retirement savings rules.

Some of the fundamental changes brought about by this act include, but are not limited to, an increase in catch-up contributions, a raise in the starting age for required minimum distributions, rollover of 529 Plan balances to Roth IRAs, and, automatic enrollment in 401(k) plans, among others. Below is a quick breakdown of the significant changes.

SECURE Act 2.0 Retirement Provisions

Version 2.0 of the SECURE Act addresses the retirement crisis witnessed across the United States. This new legislation was passed into law in December 2022 and brought critical modifications to the SECURE Act of 2019. Here are the main reforms that will influence your savings and retirement strategy.

Changes in Catch-up Contributions

Catch-up contributions help workers aged 50 and above to save more towards their 401(k) and individual retirement accounts. The Secure Act 2.0 improves and expands on these catch-up contributions in the following ways.

Starting in 2025, the SECURE Act will allow older workers aged 60 to 63 who are behind on their savings goals to make an additional $10,000 or 150% of the standard catch-up contribution per year (whichever is greater of the two).

From 2024, catch-up contributions will be deposited in Roth accounts, except for workers who earn an annual income of $145,000 or less.

SECURE Act 2.0 has introduced a scheme for increasing IRA catch-up contributions as the cost of living rises.

The benefits of these changes are significantly felt by older people who didn’t contribute enough to their savings and retirement accounts in their early employment period, primarily because of low pay, the high cost of raising a family, student loans, or mortgage repayments.

Automatic 401(k) Enrollment

The SECURE Act 2.0 makes it clear that a 401(k) is the ideal and default solution for retirement savings. An employee will automatically opt into a 401(k) with a default contribution of 3% of their salary. The rate will increase annually to reach at least 10%, and employees looking to opt out should do so proactively. Businesses with ten or fewer employees, church plans, government plans, and new companies with less than three years in operation are exempt from automatic 401(k) enrollment.

Changes in Required Minimum Distributions (RMDs)

RMDs are a way in which the government forces you to empty the pre-tax retirement accounts and pay taxes on the distributions. The new laws increase the starting age for RMDs from 72 to 73 starting in 2023, and in 2033, the starting age will increase to 75.

In other words, if you were born between 1951 and 1959, you’ll start taking RMDs when you turn 73. And if you were born in 1960 or later, you’ll begin taking RMDs at age 75. Those currently taking RMDs under 72 are not impacted by this new provision and will follow the existing schedule.

529 to Roth Conversions

The SECURE Act 2.0 makes the 529 education savings plan a more attractive investment option for parents who have always seen this plan as a gamble. Initially, the 529 plan was under-utilized since it offered income tax deductions only if you live in specific states. Withdrawing the money for non-qualifying expenses would cost you up to 10% in penalties.

With the new provision, the 529 plan now allows you to convert up to $35,000 into Roth IRA without penalties for five to six years, provided the account has been open for over 15 years.

401(k) Emergency Distributions and Penalties

Before the SECURE Act 2.0 was enacted, any money withdrawn from a pre-tax retirement account incurred a 10% penalty on distributions. But with this law in place, employees can withdraw up to $1,000 as an emergency distribution without penalty. The law allows you to repay the distribution within three years, before which you cannot take out another emergency distribution.

The SECURE Act 2.0 also permits employers to enroll employees automatically in emergency savings accounts (contributing 3% of the salary or less) linked to their retirement accounts. The account is limited to $2,500, and the first four withdrawals in a year aren’t subject to charges.

Roth Employer Match

Starting in 2023, employees signed up with a Roth 401(k) can receive employer-matching contributions into their Roth 401(k) and not the pre-tax 401(k). However, this option isn’t a mandatory change, and it’s up to plan providers and employers to make this option available to participants.

Final Thoughts

The SECURE Act 2.0 is a powerful provision that gives employees more flexibility in how they contribute to their retirement. It also adds value to most plans and, moreover, encourages employees to be more intentional about their contributions. These changes are just a few of what can be expected from this provision. Others include the employer match for student loan payments and the end of RMDs for Roth 401(k) contributions.

DISCLAIMER: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

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