As 2022 drew to a close, Congress passed the SECURE 2.0 Act as part of an omnibus appropriations bill. SECURE 2.0 updated several retirement plan provisions designed to foster increased participation and savings. Read on to learn more about some of the key provisions of SECURE 2.0 and how they might impact your future plans.
RMDs can begin later
An individual must begin taking required minimum distributions (RMDs) from a qualified retirement plan starting with the year in which they reach a certain age. In 2022, that age was 72. (It was 70 ½ until SECURE 1.0 passed in 2019.) Because an initial RMD can be delayed until April 1 of the following year, someone who reached age 72 in 2022—i.e., someone born in 1950—was required to take their first RMD no later than April 1, 2023.
A retiree born in 1950 who delayed their 2022 RMD until early 2023 still needs to take their 2023 RMD no later than December 31, 2023. (This would mean two years of RMDs during the 2023 calendar year: one for 2022, and another for 2023.)
Some retirement plans allow folks who are still working past the typical age when RMDs are required to delay RMDs until they actually retire. Check with your plan administrator to see if this is an option for you.
Under SECURE 2.0, Congress increased the age that triggers RMDs. This allows you to let your retirement savings continue to grow before you must begin making withdrawals.
Individuals born 1951 through 1959: age 73
Individuals born 1960 and later: age 75
Of course, for anyone planning to access their retirement funds before their 70s—which includes most folks on the FIRE path—this update makes no difference.
RMD penalties decrease
Currently, taxpayers who fail to take an RMD are subject to a 50% penalty. It is no coincidence that the penalty is more than what would have been the tax on that RMD!
The penalty now decreases to 25% starting in 2023, and may be as low as 10% in certain circumstances.
Increased IRA catch-up contributions
In 2023 and earlier, individuals reaching age 50 by the end of the year are allowed to make an additional $1,000 IRA contribution beyond the normal limit.
Rather than being stuck at $1,000 without Congressional action, that amount will now automatically increase according to inflation. The IRS will announce the 2024 IRA catch-up contribution amount later this year.
If you retire early, so you are no longer making IRA contributions, this does not impact your situation.
Automatic enrollment in 401(k) and 403(b) plans
Businesses adopting new 401(k) and 403(b) plans must now automatically enroll eligible employees into the plans, starting with a default contribution rate of at least 3%.
Employees can still contribute an amount different than the default rate or opt out altogether.
Businesses with ten or fewer employees or less than three years of operations are exempt from the new automatic enrollment requirement.
Part-time employees eligible sooner
Businesses offering retirement plans must allow employees who are part-time employees for at least three years to participate in those plans. Starting in 2025, part-time employees must be allowed to participate after only two years of service. Business owners may, of course, offer more favorable eligibility requirements.
Increased employer plan catch-up contributions
Participants in an employer-sponsored retirement plan who will be at least 50 years old by the end of the year are currently allowed to make catch-up contributions of up to $7,500 beyond the current contribution limits. That catch-up amount will increase to up to $10,000 for employees aged 60 through 63.
Beginning in 2026, all catch-up contributions must be Roth contributions if you earned more than $145,000 in the previous year.
Of course, if you will be sipping a piña colada on the beach in the sun by the time you turn 60, these increased catch-up contributions will not impact your plans.
Student loan payments can count towards an employer match
An employer match to a 401(k) (or other qualified plan) is an important workplace benefit. Contributing enough to maximize any employer match is high on the FIRE order of operations because an employer match is literally free money.
Despite its importance, though, many folks still struggle to contribute enough to maximize an employer match. Thanks to SECURE 2.0, folks who struggle to contribute enough to a 401(k) to receive the full employer match can now count student loan payments as contributions for this purpose under certain circumstances. In other words, if you are making student loan payments, your employer might be able to match some or all of those payments with contributions towards a retirement account.
Employer matching contributions to Roth accounts
Currently, all employer matching contributions are on a pre-tax basis. Under SECURE 2.0, employer matching contributions can now be made to Roth accounts.
Check with your plan administrator to see if this is an option. It will take time, though, for plans to offer employer Roth contributions and payroll systems to update accordingly.
If you choose to have your employer contribute to a Roth account, you will be taxed on the amount of those contributions now.
Emergency savings option within workplace retirement plans
Beginning in 2024, defined contribution plans may include a Roth emergency savings account. Contributions are limited by the employer (but no more than $2,500 annually) and may be eligible for an employer match. The first four withdrawals in a year are tax- and penalty-free.
Expanded withdrawal options are available
Withdrawals from retirement plans prior to age 59.5 are typically subject to a 10% early-withdrawal penalty, in addition to treating the amount withdrawn as gross income (which would apply regardless of age). SECURE 2.0 adds several exceptions to this penalty:
emergency personal or family expenses up to $1,000 once per year;
domestic abuse survivors may withdraw up to $10,000 (or 50% of their account value, if less); and
victims of certain natural disasters may withdraw up to $22,000 without penalty, and have the option of treating the amount withdrawn as gross income over three years.
Saver’s match
Currently, low and middle-income employees are eligible for a nonrefundable saver’s credit of up to $2,000 on their federal income tax return based on their retirement contributions during the year. Beginning in 2027, the saver’s credit will be replaced by a matching program that provides a federal matching contribution directly into their retirement account.
For folks who are already contributing towards retirement accounts—whether an IRA, workplace retirement plan, or both—this update will not change your plans.
529 plan updates
Prior to SECURE 2.0, the only option owners of a 529 plan had regarding leftover funds when the beneficiary finished their postsecondary education, or opted not to attend school, was to name a new beneficiary of the account.
Now there is another option: 529 plan assets can be rolled over to a Roth IRA for the beneficiary once the 529 plan has been in force for fifteen years, up to a $35,000 lifetime limit and subject to the annual Roth IRA contribution limit. (As a result, it may take several years to roll over 529 plan funds to a Roth IRA.)
Bottom line
There are dozens of other provisions in SECURE 2.0, but there is simply not enough space to cover them all. (The legislation spans 130 pages from 136 Stat. 5275 through 5404!) I chose to focus on the ones above because they are the ones most likely to impact individuals as they navigate the retirement and financial planning landscape.
These may impact you significantly or perhaps not at all. Everyone has a different path. Reach out to me for assistance if you would like to discuss updating your own plans.
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