The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act revised existing rules around retirement saving. In December of 2022, Congress passed, and President Biden signed into law, a follow-up package–the SECURE 2.0 Act, which focuses on legislation that can help strengthen the retirement system and improve retirement-savings opportunities.
Some of the changes take effect in 2023, such as:
• A higher RMD starting age
• Lower penalties for insufficient RMD-related withdrawals
• Several new exceptions to the early-withdrawal penalty
• Some new Roth instruments
Other changes take effect in 2024 and beyond, such as:
• Exemption of Roth employer-based plans from lifetime RMDs
• Emergency savings tools within 401(k) plans
• 529 plan rollovers to Roths
• More generous catch-up contributions
• Automatic enrollment of employees in 401(k) plans
• A new tax credit mechanism for low-income workers
The following details 9 key benefits of SECURE 2.0.
1 – RMD Starting Age
The concept behind retirement accounts such as 401(k)s, 403(b)s, and IRAs is to accumulate savings that will be used during a retiree’s lifetime–not as a way to transfer wealth to future generations. The IRS also wants access to the tax revenues held in tax-advantaged accounts, hence the requirement for account holders to start withdrawing money at a certain age. Mandatory distributions, called Required Minimum Distributions (RMDs), are calculated as a percentage of the balance in the retirement account.
The starting age to withdraw RMDs was 70½ for many years, but was raised to age 72 by the SECURE Act of 2019. As of January 1, 2023, SECURE 2.0 raises the RMD starting age to 73 for those reaching 72 after 2022, followed by an increase to age 75 in 2033. Those currently subject to RMDs under earlier rules must continue to follow their existing RMD schedule.
2 – Updated RMD-related Penalties
RMD withdrawals are calculated as a sliding percentage of the balance in the retirement account on December 31 of the tax year in question, and must be taken by April 1 of the following year. The penalty for not withdrawing the total RMD amount has been 50% of the missing withdrawal, but SECURE 2.0 drops the penalty to 25% of the shortfall, with a further reduction to 10% if corrected promptly.
3 – Penalty-free Withdrawals
If you withdraw funds from a tax-advantaged 401(k) or IRA account before age 59½, a 10% penalty is added to the federal personal income taxes due on the amount withdrawn. SECURE 2.0 has added several new exceptions to the 10% early distribution penalty with differing effective dates, including:
• Federally declared natural disasters, $22,000 limit (retroactive to 1/26/2021)
• Terminal illness (effective immediately)
• Domestic abuse, the lower of $10,000 or 50% of the account balance (effective 2024)
• Financial emergencies, $1,000 limit per year (effective 2024)
• Long-term care premiums, $2,500 limit per year (effective 2025)
Requirements vary among the exceptions, but some include repaying the withdrawal within three years to avoid new penalties and taxes.
4 – Roth-related Changes
Roth IRAs are funded with after-tax money, which the IRS prefers because it doesn’t have to wait until you withdraw your funds to access tax revenues. Under SECURE 2.0, starting in 2023, Roth versions of SEP and SIMPLE plans are being introduced. Also, starting in 2024, all over-50 catch-up contributions for higher-income savers will have to be made as Roths with after-tax funds.
In 2024, Roth employer-based plans will become exempt from lifetime RMDs (as they are for Roth IRA account holders today). Until now, those Roth plans have been subject to RMDs during the saver’s lifetime.
5 – Emergency Savings in 401(k)s
Workers with no emergency savings tend to withdraw funds from employer-sponsored retirement accounts to cover urgent needs. Starting in 2024, SECURE 2.0 will create emergency savings accounts within employees’ retirement plans, to which employees can contribute voluntarily to prevent such withdrawals. Employers can also auto-enroll their “non-highly compensated employees” at up to 3% of pay until the employer-set maximum contribution is reached (up to $2,500 is allowed). Contributions are made on an after-tax Roth basis, and any excess above the maximum would go into the employee’s retirement account.
6 – 529 Plan Rollover to Roth
A 529 plan is a tax-advantaged savings plan used to pay for qualified education expenses for K-12, college and apprenticeships. One concern when contributing to a 529 plan is that the funds will not be used. To eliminate this concern, starting in 2024, SECURE 2.0 will permit tax-free and penalty-free rollovers from 529 savings accounts to Roth IRAs for 529 beneficiaries.
SECURE 2.0 does set some conditions for this rollover benefit: the 529 plan has to be open for at least 15 years, and the amount you can roll over in any year must remain within that year’s Roth IRA contribution limit. Also, the maximum amount rolled over during the beneficiary’s lifetime is $35,000.
7 – Catch-up Contributions
In addition to regular contributions, the IRS allows workers approaching retirement age to set aside more money as ‘catch-up’ contributions in IRAs, 401(k)s, and other retirement accounts.
If you are over 50 and have IRAs, the maximum catch-up contribution in 2023 is $1,000. While the $1,000 catch-up amount has remained constant for some time, starting in 2024, the amount will be indexed for inflation, thanks to SECURE 2.0.
If you are over 50 and have a 401(k), 403(b), 457(b), or federal government Thrift Savings Plan, your catch-up limit in 2023 is $7,500. Starting in 2025, as you get closer to retirement – at age 60 through 63 – you can ‘upsize’ your catch-up contribution to the greater of $10,000 or 150% of the standard catch-up amount (an $8,000 standard limit would become $12,000, for example). Also, the $10,000 figure will be adjusted for inflation after 2025.
8 – Automatic Enrollment for Employees
Because not enough employees take advantage of the employer-sponsored retirement programs available to them, SECURE 2.0 will make the enrollment of workers automatic, with specific exceptions. Employees will participate by default unless they proactively opt out. Some exceptions apply, including businesses with ten or fewer employees or companies under three years old.
Starting in 2025, employers will have to auto-enroll employees in newly created 401(k) and 403(b) plans. Initial contribution rates will be between 3% and 10% of pay, increasing by 1% each year until the rate hits at least 10% but not more than 15%. Plans in existence when SECURE 2.0 was enacted are grandfathered.
9 – Tax Credit for Low-Income Workers
The Saver’s Credit is an underutilized nonrefundable tax credit worth up to $1,000 yearly, which is available to low- and moderate-income workers who contribute to employer retirement plans or IRAs. Starting in 2027, under SECURE 2.0, the Saver’s Credit will be replaced by the Saver’s Match, where the federal government matches 50% of a saver’s contributions up to $2,000 and deposits the match in the taxpayer’s IRA or retirement plan. Withdrawal before retirement may result in penalties, including repayment to the federal government.