With unusual bipartisan cooperation, Congress passed and on 12/29/2022 the President signed the SECURE Act 2.0. It expands the sweeping retirement law changes effective in 2020 in the original SECURE (Setting Every Community Up for Retirement Enhancement) Act. Some SECURE 2.0 provisions are effective immediately, and some are delayed to future years. Here are some of the most interesting provisions:
- Automatic Enrollment For New Plans Beginning in 2025: Starting in 2025, all new plans (except those for 10 or fewer employees, businesses less than 3 years old, or churches) must automatically enroll eligible employees to contribute at least 3% of their pay to the retirement account. Employees can then opt-out if desired. This should improve participation because humans tend to leave alone whatever the “default” provisions are.
- RMD Ages are Delayed: The age requirement to begin taking RMDs increases from 72 to 73 in 2023, and then to 75 in 2033. Also, effective now, the penalty for not taking an RMD is reduced from 50% to 25%, and in some cases to 10% (if you correct the failure timely). The previous 50% penalty hit hard on first-time RMD takers unfamiliar with the system, and on those with less financial sophistication (often lower-income persons).
- Catch-up Amounts Increased for Older Savers: In 2023, participants age 50 and older can contribute an extra $7,500 per year annually to their 401(k) account. This amount increases to $10,000 per year starting in 2025 for participants age 60 to 63. Additionally, catch-up provisions automatically adjust for inflation in future years. In what many experts think was a drafting error, beginning in 2024, all catch-up contributions by employees earning over $145,000/year must be made with after-tax dollars. That seems at odds with the SECURE Act approach, so watch for further action later this year.
- Long-term Part-time Employees: The SECURE Act provided that long-term, part-employees (who worked between 500 and 999 hours for three consecutive years) could be eligible to participate in their company’s retirement plan. SECURE 2.0 reduces that requirement to two years in 2025.
- Emergency Savings: Beginning in 2024, participants can withdraw up to $1,000 per year from their retirement savings account for emergency expenses without having to pay the 10% tax penalty for early withdrawal if they’re under age 59½. In addition, companies could allow employees to set up an emergency savings account through automatic payroll deductions, up to $2,500 maximum.
- Domestic Violence Survivor Early Withdrawal: Beginning in 2024, survivors of domestic violence can withdraw $10,000 or 50% of their account (whichever is less) without the 10% early withdrawal penalty for those under 59 ½.
- Left-Over 529 Rollover: Starting in 2024, if you are the beneficiary of a 529 account that has existed for at least 15 years, and funds are left over after all anticipated school expenses, you can roll it over to a Roth IRA tax-free and penalty-free, subject to a $35,000 transfer limit.
- Student Loan Debts: Many younger workers with student loan debt find it necessary to pay loan debt with funds they might otherwise save for retirement. Beginning in 2024, student loan payments can count as retirement contributions for the purpose of qualifying for an employer match. This means employers will be able to make contributions to their company retirement plan on behalf of employees who are paying student loans instead of saving for retirement.
There are many other provisions of SECURE Act 2.0, of course. If you’d like a deep dive into its provisions and their effective dates, here is a good resource from the American Society of Pension Professionals and Actuaries: https://www.asppa.org/news/key-secure-20-act-provisions-and-effective-dates.