Legislation is a fluid stream, changing periodically to meet the needs of current citizens. One significant piece of recent legislation is the SECURE 2.0 Act, which introduces over 90 provisions affecting various retirement savings plans. Not all changes will take effect immediately; some started in 2023, while others will roll out through 2027. Knowing these changes is essential for preparing for the future.
Distributions
Previously, Required Minimum Distributions (RMDs) were mandated to start at age 72. SECURE 2.0 raised this age to 73 beginning January 1, 2023. This means individuals who turned 72 in 2022 still had to take their first RMD by April 1, 2023. Further, the RMD age will eventually increase to 75, providing more flexibility but also posing tax implications and practical challenges, especially for those with lower incomes who rely on these distributions.
Inherited IRAs
The IRS has postponed the final rules for RMDs on inherited IRAs until 2025. During this period, penalties for missed RMDs from specific IRAs inherited between 2020 and 2023 are waived. The penalty for missing an RMD has been reduced from 50% to 25%, or potentially 10%, under SECURE 2.0. This delay allows beneficiaries more time to understand and comply with distribution requirements.
RMDs
Starting in 2024, RMDs will no longer be required for Roth 401(k) accounts in employer plans, aligning them with Roth IRAs, which are not subject to RMDs. This change necessitates careful planning to understand its impact on retirement strategies.
Adjustments
Employers can now offer small financial incentives, such as gift cards, to encourage employee participation in retirement plans. This provision became effective in January 2023.
Emergency
From 2024, the SECURE 2.0 Act permits early “emergency” withdrawals up to $1,000 from retirement accounts for immediate financial needs, without the usual 10% penalty. If the distribution is not repaid within a specific period, no further emergency withdrawals can be made for three years. Additionally, penalty-free withdrawals for small amounts in cases of domestic abuse are now allowed.
Enrollment
Starting in 2025, the Act mandates automatic enrollment in 401(k) and 403(b) plans, which has been shown to increase participation. Eligible participants can opt-out if they choose. Automatic enrollment simplifies the process and encourages more employees to start saving for retirement early.
Contributions
Currently, individuals aged 50 or older can make catch-up contributions to their retirement plans up to certain limits. SECURE 2.0 increases these limits from 2025, allowing contributions up to $10,000 or 50% more than the regular catch-up amount for those aged 60-63. These amounts will be indexed for inflation after 2025, helping higher earners boost their savings towards the end of their careers.
Roth Catch-up Contributions
For high earners aged 50 or over (earning $145,000 or more in the previous year), catch-up contributions must be made on a Roth basis starting in 2026. This means contributions are made with after-tax money, but withdrawals in retirement will be tax-free. This rule was initially set to begin in 2024 but has been delayed due to implementation challenges.
Student Loan
From 2024, employers can make matching contributions to an employee’s retirement account based on the employee’s student loan payments. This provision aims to help those with significant student loan debt save for retirement. Given that student loan payments resumed in fall 2023 after the U.S. Supreme Court struck down debt forgiveness plans, this is a timely benefit for many.
529 Plan Rollovers
Beginning in 2024, SECURE 2.0 allows for limited rollovers from 529 plans to Roth IRAs. These rollovers are subject to various requirements, including that the Roth IRA account must be in the name of the 529 plan beneficiary and that the 529 plan must have been maintained for at least 15 years. The rollovers are limited to the annual contribution limit with a lifetime cap of $35,000.
The SECURE 2.0 Act brings significant changes to retirement savings plans, providing more flexibility and options for savers. By knowing the new rules around RMDs, 401(k) adjustments, contribution limits, and other provisions, you can better prepare for your retirement. Whether you are just starting your career or nearing retirement, these changes offer opportunities to optimize your savings and ensure a secure financial future.
FAQs
What age does SECURE 2.0 set for RMDs starting in 2023?
The age for RMDs is raised to 73, eventually increasing to 75.
When will RMDs no longer be required for Roth 401(k) accounts?
Starting in 2024, RMDs will not be required for Roth 401(k) accounts.
What are the new catch-up contribution limits under SECURE 2.0?
From 2025, individuals aged 60-63 can contribute up to $10,000 or 50% more than the regular catch-up amount.
How does SECURE 2.0 assist employees with student loan debt?
From 2024, employers can match retirement contributions based on student loan payments.
What is the limit for 529 plan rollovers to Roth IRAs?
529 plan rollovers to Roth IRAs are limited to the annual contribution limit with a lifetime cap of $35,000.