SECURE 2.0 Act Will Increase the Savings Potential for Many

Last-minute omnibus spending acts are quite common for Congress, and 2022 was no exception with Congress passing a $1.7 trillion package containing the SECURE Act 2.0 shortly before the holidays began and the President signing it just short of year end.

While the SECURE Act 2.0 makes some broad-stroke changes, we’ll likely see IRS interpretations in the next few weeks as well as companies amending their retirement plans to accommodate these changes.

As expected, Congress has increased the age at which retirees must take mandatory distributions from their retirement accounts. Starting Jan. 1, the age for required minimum distributions increases to 73, and then increases the age to 75 in 2033. The Act also reduces the penalty for failure to take an RMD from 50% of the amount not taken to 25%, adding that if the failure to take the distribution is corrected in a timely manner, the penalty is further reduced to 10%. For charitably inclined seniors, the Act expands the qualified charitable distribution provision allowing for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.

The Act also modifies the exceptions for early IRA withdrawals to include certain distributions for emergency expenses up to $1,000 a year with a three-year repayment option. Additionally, beginning in 2024, domestic abuse survivors will be able to take penalty-free withdrawals of $10,000 or 50% of their retirement account, whichever is less.

For investors who are still saving for retirement, employer-sponsored retirement plans may begin offering participants the option to designate a portion or all the employer’s matching or non-elective contributions as Roth 401(k) contributions; however, the amount will be included in the employee’s income for the year. Understand that it may take time for employers and plan administrators to accommodate this change. For employees who already contribute to a Roth 401(k), the SECURE Act. 2.0 eliminates the required minimum distributions beginning in 2024.

The SECURE Act 2.0 also made strides in allowing employers to aid their employees in retirement savings. Beginning in 2025, newly adopted 401(k) and 403(b) plans will automatically enroll eligible employees at a minimum contribution rate of 3% of an employee’s paycheck. Employers will also be able to provide de minimis incentives, like low-dollar gift cards, to boost plan participation. For employees who forgo participation in their company plan because they are paying off student loans, employers will be able to “match” an employee’s student loan payment with a contribution to their 401(k).

Further down the road in 2025, seniors, ages 60 through 63 will be able to make higher catch-up contributions up to the greater of $10,000 or 50% more than the regular catch-up amount in 2024. The Act also enables the creation of a database that will serve as a “lost and found” for employees who have lost track of 401(k) plans they have participated in—something especially helpful for young workers who were automatically enrolled in plans as they job-hopped early in their careers.

Another notable provision affects leftover funds in 529 education savings accounts. In 2024, the Act will allow account beneficiaries to roll over up to $35,000 into a Roth IRA without the penalty for withdrawing funds for non-educational purposes. If a 529 plan is overfunded because the student attended a cheaper school, received a scholarship, or chooses not to attend college, the money can be repositioned as retirement savings.

These are just a few of the provisions the SECURE Act 2.0 has created in its near 400 pages in length. If you have questions on how the SECURE Act. 2.0 may affect you, the experts at Henssler Financial will be glad to help: