Key Changes to Retirement Accounts in the SECURE 2.0 Act
Congress passed a series of new law, known collectively as the Securing a Strong Retirement Act 2.0* or simply Secure Act 2.0*. These laws are part of the $1.7 trillion spending bill Congress passed before closing for the Christmas holiday in December.
The original SECURE Act became effective in January of 2020. New provisions include the following:
· Mandatory auto-enrollment into company-sponsored retirement plans
Automatic enrollment into 401(k) and 403(b) plans won't require people to contribute, it will simply provide initiative. If the enrolled employees don’t want to make contributions, they will need to opt out.
· Annual Catch-Up Limits Increase for Contributors age 50+
Section 106 of the SECURE Act maintains the $1,000 for an IRA but adds indexing (a yearly review that will allow for adjustments based on market conditions such as inflation).
Section 107 includes a distinct increase in annual catch-up limits for individuals who have reached age 61, 62, 63, and 64 (eligible to make contributions of up to $10,000 to a retirement plan.) This will also allow for indexing. (Starting in 2025)
· Roth Matching as a Contribution Option
Contributors participating in a company match can now opt to receive a match on a Roth account (after-tax contributions). Prior to the SECURE Act matching contributions could only be made on a pre-tax basis.
· Required Minimum Distribution (RMD) Age Increase
Required Minimum Distributions (RMD) are mandatory withdrawals you must take from certain retirement accounts after you reach age 72. With the SECURE 2.0 Act, the age has been upped from 72 to 73 in 2023. And the plan is for it to continue to increase – to and 75 starting on January 1, 2033.
· No RMDs for Roth 401(k) Account Owners
Under the current law, Roth IRA owners aren’t required to take distributions during their lifetime while Roth 401(k), Roth 403(b), and Roth governmental 457(b) accounts are subject to mandatory Required Minimum Distributions (RMD) withdrawals.
Section 325 of SECURE Act 2.0 repeals the RMD requirement for designated Roth account participants. As a result, beginning in 2024, employees may decide between keeping their assets in a designated Roth account or rolling them over to a Roth IRA without having to consider RMDs during their lifetime.
· Enhancement of 403(b) plans
Under current law, 403(b) plan investments are generally limited to annuity contracts and publicly traded mutual funds. Section 128 would permit 403(b) custodial accounts to participate in group trusts with other tax-preferred savings plans and IRAs, and would be effective after date of enactment.
· Change of Part-Time Employees Eligibility to Participate in Retirement Savings Plans
Part-time employees are currently eligible to participate in an employer-sponsored 401(k) after three consecutive years of service. With the new act in place, that is lowered to two years.
· Emergency Savings
Defined contribution retirement plans (for example 401k and 403b plans) will be able to add an emergency savings account associated with a Roth account starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first 4 withdrawals in a year would be tax- and penalty-free. Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses.
· Student Loan Repayment Incentive
Employers are now allowed to make matching contributions to a 401(k) plan, 403(b) plan, or SIMPLE IRA for qualified student loan payments.
· Conversions from 529 Plans to Roth IRAs
After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit.
This landmark legislation helps Americans better prepare for retirement by making their access to the retirement savings system easier and through expanded investment choices.
This article covers only some of the changes made by SECURE Act 2.0. Everyone's financial situation is unique. It is always a good idea to consult with a financial advisor and tax professional to understand how the changes in SECURE 2.0 apply to your specific situation.
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*Secure Act 2