Secure 2.0 Act: What does it mean for you?
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In late December of 2022, Congress passed, and President Biden signed the $1.7 trillion omnibus spending bill. One part of the bill is the SECURE 2.0 Act, which expands on the original SECURE Act of 2019 by enhancing many features related to investors.
While there are many changes to the law, the most important aspects of this legislation for investors include the following:
- Mandatory retirement account enrollment
- Flexibility for emergency spending from retirement accounts
- Increases to retirement account contribution limits
- Employer matching for student loan payments
- Changes to Required Minimum Distribution rules
- Expanded opportunities for Roth accounts
Mandatory Enrollment and Automatic Increases in Employer Retirement Plans
Starting in 2025, employers that offer 401k or 403b plans will be required to enroll participants in their sponsored retirement plan. Employers can set the automatic contribution level between 3% and 10% of salary and then can set that contribution rate to increase by 1% per year to a maximum of 15%.
Employees will be able to opt-out of these provisions. However, according to the legislation, a study has shown that auto-enrollment could increase long-term participation in a 401k plan from 19% to 75%. These benefits were most prominent in younger, lower-wage, and racial minority employees.
Increased Flexibility for Emergency Savings
Starting in 2024, individuals can withdraw up to $1,000 once per year from their 401k, 403b, or IRA without paying the standard 10% penalty if an unforeseen family emergency or immediate financial need arises. The amount withdrawn may be paid back into the plan within three years.
The legislation also allows employers to create pension-linked emergency savings accounts. These accounts let employers match employee contributions of up to $2,500 into an account that provides the flexibility of up to four penalty-free withdrawals each year.
High (and More Complicated) Catch-Up Contributions
Employees 50 years or older can contribute more to their employer retirement plans and IRAs than younger workers—often called “catch-up contributions.” Moving forward, the SECURE 2.0 Act makes a few important changes to these extra contributions.
First, starting in 2024, the catch-up contribution amount will be indexed to increase each year with inflation. This applies to catch-up contributions of both employer plans and IRAs.
Secondly, starting in 2025, a higher tier of catch-up contributions will be allowed in employer plans for workers aged 62, 63, and 64. Workers in that age group can make a catch-up contribution of $10,000, above the $7,500 limit that exists today. In addition, since the catch-up contribution will be indexed to inflation, as inflation increases, so will this group’s benefit.
Student Loan Matching
Starting in 2024, employers are allowed (but not required) to provide matches into employer retirement plans for payments an employee makes towards student loans. This would allow individuals to receive a company match even if they are not contributing to their employer retirement plans.
Changes to RMDs
In 2019, the original SECURE Act increased the age for required minimum distributions (RMDs) to 72 years old. Starting in 2023, the RMD age will increase to 73 years old. In 2033, the age will increase to 75.
The penalty for a missed RMD has been reduced from 50% of funds that should have been taken to 25%. The legislation also eliminated RMDs from Roth 401ks beginning in 2024 (Roth IRAs are already exempted from RMDs).
Expanded Roth Options
Starting in 2023, employees can make Roth (post-tax) contributions to SIMPLE and SEP IRAs. In addition, employers will now be able to make matching contributions into Roth 401k, 403b, or 457b accounts.
Additionally, starting in 2024, 529 education savings account beneficiaries will be permitted to roll up to $35,000 from their 529 accounts to their Roth IRA. However, this benefit only applies if the 529 account has been established for at least 15 years, and the rollover is a replacement of (not in addition to) the annual contribution limit, so rolling over the entire $35,000 would take place over several years.
Summary
The items addressed above are just a sample of the changes covered in the 90 sections of the legislation. Please talk with your financial advisor to determine if any new rules impact you.
Jonathan Koop, CFA, is a Senior Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Jonathan at jkoop@bedelfinancial.com.