By Steve Tepper, CFP®, MBA
Late last year, Congress passed the second part of the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which will bring many changes to retirement planning in the years ahead.
The first SECURE Act bill was passed in 2019, and among its provisions were:
Raising the required minimum distribution (RMD) age for retirement accounts from 70.5 to 72
Allowing long-term, part-time employees to participate in 401(k) plans
Making it easier for small businesses to offer retirement plans by increasing the tax credit for start-up costs
Repealing the maximum age for traditional IRA contributions
Allowing penalty-free withdrawals for expenses related to the birth or adoption of a child
Allowing 401(k) plans to cover their employees’ student loan payments as a form of hardship withdrawal
The advisor community is still poring over SECURE 2.0—It’s 4,155 pages long! Practically a Stephen King novel!—but here are a few highlights we’ve come across:
For anyone who has not turned 72, the new RMD age is raised to 73 starting this year. It will increase to 75 in 2033.
One of the most onerous penalties in all of retirement planning has been eased. The penalty on missed or short RMDs is reduced from 50% to 25%. It can be further reduced to 10% if the mistake is corrected within two years.
Roth 401(k) account holders will no longer be required to take RMDs starting in 2024.
Beginning in 2025, older investors will have a second tier of catch-up contributions to retirement accounts. Currently, people over age 50 can make a larger contribution to their retirement account: The 401(k) contribution limit for 2023 is $22,500, but workers over age 50 can put in an additional $7,500, or $30,000 total. Under the new act, beginning in 2025, workers age 60 to 63 can make an additional contribution equal to 50% of the age 50 catch-up amount. So if the current limits were the same, they could defer an extra $3,750 for a total of $33,750. (Note: Catch-up contributions will have to be made after-tax for higher earners starting in 2025.)
The catch-up contribution for IRAs has been flat at $1,000 for some time, despite the regular amount increasing with inflation. Beginning next year, the catch-up amount will also be indexed to inflation.
Starting a 401(k) for your small business will be easier than ever, with a “starter 401(k)” plan that simplifies requirements and expands tax credits. Starting in 2025, all employees will automatically be enrolled in a new plan and must “opt out” if they don’t wish to be included. Additionally, their contribution amount will automatically increase each year unless they actively change it.
Employers can allow employees with Roth 401(k) accounts to have their employer match to their Roth, rather than a separate non-Roth 401(k) account.
Beginning in 2027, lower-income individuals will receive a “Saver’s Match” from the federal government for their contributions to an IRA account of up to $2,000 per year.
There are many other interesting provisions and features in the new law. Here are some more:
Starting in 2024, employers can match student loan payments directly into a 401(k) account, effectively reducing the need for employees with student loan debt to take a hardship withdrawal from their retirement account as allowed in SECURE 1.0.
Starting in 2024, employees can make a penalty-free withdrawal from a Roth retirement account of up to $1,000 designated as a “rainy day fund” for emergencies like the type seen during the pandemic.
Effective in 2023, victims of domestic abuse can withdraw up to $10,000 from their retirement account without penalty.
Effective in 2023, victims of a federally declared disaster can withdraw up to $22,000 from their retirement account without penalty.
Starting in 2024, unused money in a 529 college savings plan can be rolled into a Roth IRA in the name of the same beneficiary, provided the 529 account has been open for at least 15 years.
A national “retirement savings lost and found” database will be created to help people find retirement accounts and benefits from previous employers.
There’s definitely a lot there and a lot to digest. If any of these sound applicable or useful to you, give your advisor a call!