SECURE 2.0: What It Means for You
In 2019 the SECURE (“Setting Every Community Up for Retirement Enhancement”) Act made the first major changes to the U.S. retirement system in over a decade. Shortly after the SECURE Act was signed into law, the U.S. House and Senate began working on follow-up legislation to expand retirement plan access to more workers and make other changes. Three years later that follow-up legislation is upon us, referred to as “SECURE 2.0”, signed into law by the President on December 29, 2022 after passage by the Senate on December 22 and the House on December 23. Following are some key points that have meaning for our clients.
Access and age are key themes of SECURE 2.0:
Access: to make retirement plans available to more workers, including part-time workers, small business employees, and student loan borrowers. This imposes on employers more requirements in offering and contributing to plans. The concept of access also includes increased opportunity for workers and retirees to save.
Age: SECURE 2.0 further increases the age that required minimum distributions (“RMDs”) must begin and makes other age-related changes, all of which are designed to increase saving.
Key SECURE 2.0 provisions include:
- Requiring automatic 401(k) enrollment. But businesses with ten or fewer workers and new companies in business for less than three years are among those employers excluded from the mandate.
- Increasing age when RMDs must start, which SECURE Act of 2019 already increased from 70 ½ to 72, now increased to age 73 in 2023 and then to age 75 in 2033.
- Reducing penalty for failing to take RMDs, which under prior law was 50%, to 25% and in some cases 10%.
- Creating bigger “catch up contributions” for older retirement savers. Pre-SECURE Act 2.0 once age 50 you could contribute an extra $6,500 per year to your 401(k). SECURE 2.0 increases that limit to $10,000 (indexed for inflation) starting in 2025 for ages 60 to 63. All catch-up contributions will be subject to Roth treatment, meaning made with post-tax dollars, except for annual earners of $145,000 or less.
- Improving employee access to 401(k) funds for emergencies. One provision lets employees withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the 10% tax penalty for early withdrawal if they are under 59 ½. Employers could also let employees set up an emergency savings account through automatic payroll deductions, capped at $2,500.
- Increasing part-time workers’ access to retirement accounts. SECURE Act of 2019 permitted workers of 500 to 999 hours for three consecutive years to be eligible to participate in their employer’s 401(k). SECURE 2.0 reduces that three-year requirement to two years.
- Helping employees who are repaying student loans save for retirement, making it easier for employers to make contributions to 401(k) plans (and similar workplace plans) on behalf of workers who are making student loan payments instead of contributing to their retirement plan.
- Creating a federal matching contribution for lower-income retirement savers, by an existing tax credit for low- and moderate-income individuals contributing to retirement accounts becoming a limited match funded by the government.
- Changing the required minimum distribution rules for Roth 401(k)s. Pre-SECURE 2.0, Roth IRAs require no RMDs during the original account owner’s life, but Roth 401(k)s do. SECURE 2.0 changes that. Starting in 2024 Roth 401(k)s require no pre-death distributions either.
- Broadening uses for unused college savings money. SECURE 2.0 allows for tax- and penalty-free rollovers to Roth IRAs from 529 college savings accounts that are at least 15 years old subject to limits.
- Helping military spouses get access to retirement plans. SECURE 2.0 creates tax credits for small businesses who let military spouses enroll right away in their plan and qualify for immediate vesting of employer matches.
- Providing incentives for small businesses to set up retirement plans for their workers, and encouraging individuals to set aside long-term savings.
Retired clients should consult their professionals about, among other things, the best age, for them based on their financial circumstances, to take withdrawals from their retirement accounts. Just because you don’t have to start taking RMDs until age 73 in 2023 or age 75 in 2033 doesn’t mean you can’t make withdrawals sooner starting at 59 ½ without penalty. Likewise retired clients might ask whether they can afford to convert to Roth IRAs.
Changes from the SECURE Act of 2019 and SECURE 2.0 have real impact on retirees and earners, both in their lifetimes, and on death in the passing of wealth to their families and providing for “eligible designated beneficiaries” which include spouses, minors, and disabled individuals all with special rules. As elder law attorneys we have cultivated expertise in these matters and include what these matters mean to our clients when we help them shape their estate plans.