by Maggie Polisano, Co-Founder, CamaPlan| Mar 3, 2023|
By most studies, Americans aren’t saving enough for retirement. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was created to try and reverse that trend. In 2022, President Biden signed into law SECURE 2.0, which added on to the 2019 law.
Some provisions of SECURE 2.0 went into effect as of January 1 2023. Others are still to take effect in the coming years. Here’s how the rules have changed … and how it might affect your retirement account strategy.
Higher Threshold for Required Minimum Distributions (RMD)
The law requires you to start taking required minimum distributions (RMDs) from certain retirement accounts once you attain a certain age. Under the previous law, that age was 72. As of 2023, that age is now 73. In 2033, it will increase to 75.
“This effectively allows Americans to delay withdrawing from their retirement accounts,” said Maggie Polisano, founder of self-directed IRA custodial service CamaPlan. “They can allow their assets to grow, tax-deferred, for longer periods of time.”
“But just because people can delay distributions, that doesn’t necessarily mean they should,” Polisano said. “Waiting longer can mean bigger distributions, which can mean more taxes. You can reduce that tax burden by taking distributions earlier.”
More “Catch-Up” Contributions
Current law allows Americans over the age of 50 to make additional contributions over and above their maximum standard contributions to workplace retirement accounts. SECURE 2.0 provides for a new “catch-up contribution” for employees in their early 60s.
Specifically, employees who meet the age requirement can contribute an extra $10,000 per year to their 401(k) or 403(b). That $10k cap is indexed to inflation, so we expect it to increase over time.
Automatic 401(k) Enrollment
Under the current law, employers can choose whether or not to automatically enroll new employees in their 401(k) plan. Starting in 2025, most employers will be required to enroll new employees in the company 401(k) plan, with automatic contributions ranging from 3-10% of gross income. Employees can still voluntarily opt out of the plan. Smaller and newer companies are exempt from this rule.
Additionally, part-time employees can qualify to participate in 401(k) plans more quickly — after logging 500 hours over two consecutive years, instead of the current three consecutive years.
“Lots of people don’t save for retirement because they don’t want to think about it,” Polisano said. “Automatic 401(k) enrollment will make it so fewer of them have to think about it.”
Matching Employer Contributions for Student Loan Debt Repayment
As of 2024, employers will be empowered to make matching contributions to workplace retirement accounts, not only for their employees’ own contributions, but for employees’ student debt repayments.
“People with student debt often fall behind on their retirement savings because they have to pay off the debt,” Polisano said. “Employer contributions that match their debt repayment will help them catch up and incentivize them to retire the debt quicker.”
Ability to Roll Over Excess 529 Plan Balances to Roth IRA
People often worry about overfunding 529 education plans because excess funds are subject to taxation and a 10% penalty. As of 2024, up to $35,000 of qualifying excess 529 balances can be rolled into a Roth IRA.
To qualify, the 529 plan must have existed for 15 years and the Roth IRA must have the same beneficiary as the 529 plan. Roth IRA contribution limits still apply, and contributions to the 529 plan within the last five years are not eligible, nor are the associated earnings.
Roth Employer Plan Changes
As of 2023, employees can, for the first time, direct employer matching funds to a Roth 401(k) instead of a traditional 401(k). Employers can also set up Roth accounts for SIMPLE and SEP retirement plans for the first time.
As of 2024, Roth 401(k)s will no longer be subject to required minimum distributions, just like Roth IRAs.
The “Saver’s Match”
Employees below a certain income currently qualify for a “saver’s credit,” a tax credit for their retirement account contributions.
As of 2027, this credit will be replaced by a “saver’s match” — a matching contribution by the government of up to 50% of the first $2,000 contributed each year.
“Essentially, if you qualify for the saver’s match, the Federal government will contribute $1,000 to your retirement savings each year, provided you contribute at least $2,000 yourself,” Polisano said.
More Penalty Waivers for Early Withdrawals
Most withdrawals from retirement accounts incur a 10% penalty if made before you reach the magic age of 59½. Some exceptions apply, and SECURE 2.0 added three more:
- 2023 – penalties waived if a physician certifies that the beneficiary has a terminal illness that can reasonably be expected to result in death in 84 months or less. Distributions must be repaid within three years to permanently avoid penalties.
- 2024 – “hardship withdrawals” available to victims of domestic abuse equal to the lesser of $10,000 or 50% of the vested balance of the account. The withdrawal must be completed within 12 months of the incident of abuse. It must be completely or partially repaid within three years to permanently avoid penalties.
- 2026 – Up to $2,500 can be withdrawn free of penalties to pay premiums on certain long-term care services.
New Rules for Qualified Charitable Contributions (QCD)
Under the current law, people over the age of 70½ can make tax- and penalty-free distributions of up to $100,000 from a traditional IRA to a qualified 501(c)3 charitable organization. As of 2024, this $100k cap will move with inflation.
Starting this year, there is also a one-time opportunity to direct a QCD of up to $50,000 (also indexed to inflation) to a Charitable Remainder Unit Trust (CRUT), Charitable Remainder Annuity Trust (CRAT) or a Charitable Gift Annuity (CGA).
New Rules for Qualified Longevity Annuity Contracts (QLACs)
“QLACs are an option for retirees to transfer their retirement assets into guaranteed income, completely protected from market swings,” Polisano said. “This change allows anyone with over $200,000 in retirement savings to buy the maximum guaranteed income.”
Previously, retirees were limited to spending 25% of their retirement account value on QLACs, up to a maximum of $145,000. SECURE 2.0 eliminates the percentage limitation and raises the maximum to $200,000.
“Individually, these changes seem small,” Polisano said, “but they add up.”
If you have qualified retirement accounts, have a conversation with your custodian to discuss how to maximize your retirement investment plan in light of the new rules.
