The new law is changing retirement plans for employees and small-business owners alike - and that’s not all.
After months of deliberations, the SECURE 2.0 Act passed into law last December as more than 90 provisions of an omnibus spending bill. Though multifaceted, the legislation is meant to make it easier for people to save, with incentives for employees and structures for small-business owners to offer new plans.
Some of the biggest changes are:
Delayed RMDs: Required minimum distributions (RMDs) are the amount you must withdraw from an IRA once you reach a certain age. As of January 2023, that age has risen to 73, and will go up to age 75 by 2033. The penalty for failing to take these mandatory withdrawals is also dropping from 50% to 25% of the amount that should have been withdrawn.
Employers get “Starter Ks”: A new boost to the startup credit makes it easier for small businesses to sponsor 401(k) or 403(b) plans. When starting a new plan, all employees should be enrolled by default (with the choice to opt out) and automatically set to put away between 3% and 15% of their paychecks, up to an annual limit of $6,000.
Bigger catch-up contributions: Today, anyone age 50 or older can make extra “catch-up” contributions into their retirement accounts, depositing more than the usual maximum allowed in order to get the biggest possible tax break and earn the most interest. By 2025, savers between the ages of 60 and 63 will be allowed to make catch-up contributions to a workplace plan of up to $10,000 or 150% of the regular contribution, whichever is greater.
The “Saver’s Match”: SECURE 2.0 provides for federal matching contributions to IRAs not as tax refunds or credits (as they were previously) but as regular old cash deposits into your IRA or retirement plan. The federal match will be 50% of your retirement contributions up to $2,000 per individual. Setting up the system will take some time, so deposits are planned to start in 2026.
Emergency savings accounts: Employers can now offer accounts designed to help employees avoid tapping into retirement accounts when faced with unexpected emergencies. These pension-linked emergency savings accounts are only available to non-highly compensated employees, with contributions limited to no more than 3% of their salary and capped at $2,500 (or less, if the employer so chooses).
Starting in 2023, a separate provision of the new law also makes it possible to withdraw up to $1,000 from an IRA for personal or family emergency expenses once a year, something that usually would come with a 10% early distribution penalty. These emergency withdrawals can be paid back over three years, but take heed: No further emergency withdrawals can be made during that repayment period.
College savings roll into retirement: If you’ve maintained a 529 or similar prepaid tuition plan for 15 years or longer, those funds can be moved into a Roth IRA plan in the name of the 529’s beneficiary. These transfers can’t be larger than any regular contributions made to a traditional IRA or Roth IRA for the year. And there’s a lifetime cap of $35,000
Student loan payments can go to retirement too: Employers in the private sector are now allowed (though not required) to offer their employees who make student loan payments matching contributions to a 401(k) plan, 403(b) plan, or SIMPLE IRA. Governmental employers can make similar matching contributions to their loan-paying employees’ section 457(b) plan.
Everyone’s portfolio is different, and other provisions of SECURE 2.0 may make different options possible or affect your savings in different ways. If you’ve got any questions about how the changes might alter your savings strategy, ask an advisor.
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Sources:
529s: https://www.fidelity.com/529-plans/faqs-paying-for-college
SECURE: https://www.ntsa-net.org/news-resources/what-else-new-secure-20
Background: https://www.napa-net.org/news-info/daily-news/breaking-news-final-secure-20-included-year-end-spending-bill / https://www.napa-net.org/sites/napa-net.org/files/SECURE%202.0%20Reference%20Guide_GPS_122622.pdf
For penalty-free withdrawals, the account holder of a Roth must be 59.5 years of age and have held the account for 5 years.