SECURE 2.0 Act Aims to Increase Retirement Savings for Americans
The SECURE 2.0 Act has passed, making it the largest retirement legislation since the original Secure Act hit in the late 2019.
As 55% of Americans say they don’t have enough saved for retirement, this bipartisan legislation primarily seeks to make it easier to contribute to retirement plans and use those funds appropriately for their needs in retirement.
SECURE 2.0 Act brings together multiple retirement planning bills that were proposed earlier in 2022 and combines them with the 2023 budget – bringing the total package to about $1.7 trillion.
The SECURE Act of 2019 made sweeping changes to required minimum distributions, with the most prudent change being that most non-spousal inherited retirement accounts are required to be withdrawn over 10 years rather than stretching distributions out to avoid heavy tax liabilities.
SECURE 2.0 Act, on the other hand, does much more to live up to its name – Setting Every Community Up for Retirement Enhancement – by helping Americans save for retirement, aiding those nearing or in retirement, and incentivizing small businesses to offer retirement plans.
The major provisions of this bill break down into five basic categories: expanded savings opportunities, required minimum distribution changes, expanded Roth opportunities, emergency funding and retirement plan provisions.
Expanded Savings Opportunities
The SECURE 2.0 Act requires employers to automatically enroll employees into newly created workplace 401(k) and 403(b) plans. Auto-enrolling employees not only encourages them to invest regardless of age, it also allows for employees to take advantage of employer matching contributions.
Plans must enroll participants at a minimum of 3% and up to 10% of wages and increase by 1% per year until they reach at least 10% and not more than 15% of wages as contributions into the account. Employees can choose to opt out of the auto enrollment or the auto increases.
More opportunities to save:
- Another major change is the additional catch-up contribution limits for those ages 60-63. In 2023, individuals over the age of 50 can contribute an additional $7,500 to their 401(k) on top of the $22,500 contribution limit. The SECURE 2.0 Act increases catch-up limits to retirement accounts for people ages 60-63 to $10,000 ($5,000 for SIMPLE Plans) or 50% more than the regular catch-up amount in 2025.
- The bill creates a new, simpler 401(k) or 403(b) plan for small businesses to take advantage of that include only employee salary deferrals linked to the annual IRA contribution limit amounts.
- Starting in 2027, the Saver’s Match tax credit will be enhanced to provide a match into a retirement account for those with lower income who choose to save. This was previously a tax credit, but now is deposited directly into a retirement account, capped at $1,000 (50% match on up to $2,000 of savings per year).
- For small businesses with up to 50 employees, the new bill allows for a start-up tax credit up to 100% of startup administrative costs for the first three years that a plan is established. This is capped at $5,000 per year. Previously, this credit was paid at 50% of startup costs. For those with 51-100 employees, the 50% credit remains.
- There is a new student loan repayment match where employers can help employees who are paying off student loans. An employer can make a matching contribution on behalf of the employee in a 401(k), 403(b), 457(b) or SIMPLE IRA with respect to “qualified student loan repayments.”
- IRA catch-up contributions will start being indexed for inflation. Previously, they were capped at $1,000. IRA catch-up contributions will start being indexed for inflation. Previously, they were $1,000 and did not increase annually.
Required Minimum Distribution Changes
Starting on January 1, 2023, the age to begin RMDs will move from 72 to 73. However, anyone who already turned age 72 by the end of 2022 is subject to age 72 required beginning date. Additionally, the age likely increases to age 75 on January 1, 2033. It’s “likely” because right now there appears to be a drafting typo in the bill that will probably get resolved in the future.
Keep in mind that most people will not be impacted by the RMD age increase because they are already taking out more than their RMD at 72. Nearly 80% of people took out more than their RMD at age 70.5, and it’s likely that fewer than 20% take RMD only at 72. This number would drop even more by age 73 and even further by age 75.
This provision mostly impacts people with wealth who don’t need their RMD and can leave the money to grow.
Another major RMD changes:
- The SECURE 2.0 Act reduces the penalty for missing an RMD from a 50% penalty tax to 25%. Additionally, if the RMD is corrected in a timely fashion, it would reduce the penalty again down to 10%.
Expanded Roth Opportunities
The new legislation creates a way to do a tax- and penalty-free rollover from a 529 account to a Roth IRA under certain conditions. Currently, money in a 529 that’s distributed for non-education expenses can be subject to penalties and taxes.
But under the new provision, beneficiaries would be able to do a rollover of up to $35,000 aggregate in life from a 529 to a Roth IRA in their name. The rollovers would be subject to the Roth IRA annual contribution limits and the 529 would need to have been open for at least 15 years. Earnings and contributions would be treated like any other Roth account or rollover. However, with Roth IRA rollover to a 529 the annual Roth IRA contribution dollar amount limit remains. As such, to get $35,000 over to a Roth IRA, you would need to do this over 5 years with roughly $7,000 going each year.
You can likely reposition that money back to yourself as a beneficiary to your Roth IRA or to your children’s Roth IRA. This gives parents a lot of certainty that if they do overfund or if their kid gets a scholarship, selects a cheaper school or doesn’t go to school, the money can eventually be repositioned for retirement in a tax-advantaged way.
Other important Roth changes:
- The new legislation would remove pre-death RMDs from Roth accounts, like Roth 401(k)s and Roth 403(b)s, and align them with Roth IRA rules. This means there isn’t a need to do a rollover from these accounts into a Roth IRA to avoid RMDs, which previously was common practice.
- Starting in 2023, SIMPLE IRAs and SEP IRAs will allow for Roth contributions, a change from before. The plans would have to decide to offer this feature, as it is not automatic.
- Currently, catch-up contributions can be Roth or pre-tax depending on what the plan allows. However, the new provision would require that all catch-up contributions be subject to Roth tax treatment. There is an exception for employees with $145,000 or less income the previous year, indexed for inflation, who would still be able to opt into a pre-tax account. The tax revenue gained here is to offset some of the other tax cuts or tax benefit extensions in the bill. Higher income earners would be forced to put catchup contributions into a Roth account, triggering more current taxes. This also could cause some employers to limit or cut out catch up contribution features in the plan.
- The bill will allow employers to let participants in 401(k), 403(b) and governmental 457(b) plans get matching contributions on a Roth basis. It doesn’t require plans to offer this, but it does create the option.
Over half of Americans cannot cover an unexpected $1,000 expense. And while the SECURE 2.0 Act doesn’t solve the fundamental issue of income not meeting expenses for many Americans – especially in today’s high-inflationary environment – it does open the door for ways to save for emergency fund needs in the future and provides access and penalty tax relief for those wanting to use retirement funds to help meet these emergency needs.
The SECURE 2.0 Act creates an option for employers to offer employees who are not highly compensated access to a pension-linked emergency savings account.
This new type of account would protect the principal and allow up to four withdrawals a year without penalty, taxes, or fees. The account would cap the employee contribution portion to $2,500, although the employer could set a lower limit. Earnings could also pull the total account value above that number.
Contributions to this account would be treated like a Roth account – they’d be after-tax contributions and their growth would be tax-free. Leftover money would stay in the account year-to-year and could be rolled over to a Roth account or IRA in the future.
Other emergency funding provisions:
- Exception for emergencies and unforeseen expenses: The bill creates an exception from the 10% early withdrawal penalty tax for withdrawals pre-age 59½ for a distribution up to $1,000 from a retirement account for unforeseeable or immediate financial needs relating to personal or family emergency expenses starting in 2024.
- Exception for terminal illness: Another 10% penalty tax exception for early distributions is for individuals suffering from a terminal illness. The exception would not be capped at any dollar amount and the 10% penalty tax will be waived if the account owner was suffering from a terminal illness. This aligns with other penalty tax exceptions, like those for disability and death.
- Exception for survivors of domestic abuse: Another penalty-free exception provision is for withdrawals from retirement plans for survivors of domestic abuse. This would allow retirement plan participants to withdraw up to $10,000, or 50% of their vested account balance, without penalty tax for various reasons relating to domestic abuse. This might include escaping a harmful and unsafe environment. The employer could rely on the participant’s self-certification to meet this exception.
- Exception for federally declared disaster relief: Special rules for retirement fund distributions connected with a qualified federally declared disaster were included. This provision would allow the distribution of funds up to $22,000 from employer plans and IRAs and creates an exception to the 10% penalty.
One of the most interesting changes in the bill is the creation of a national lost and found registry for retirement accounts. States run this today, but it can be almost impossible to find your funds if lost or forgotten. The way it currently works, money may sit where the plan provider was located, not necessarily the state where you live or where your employer was located.
A national directory will be beneficial for consumers, and it’s required to be launched within two years of the bill’s passing.
Other retirement plan changes:
- Rollover rules and forms are different from institution to institution, which can be a pain for consumers and lead to errors when transferring accounts. The legislation dictates a standardized process and form to hit in 2025, making everyone’s life easier when making a rollover.
- The new rules allow for more Qualified Longevity Annuity Contracts within retirement plans. Previously, accounts were capped at $135,000 in QLACs or 25% of the total account value. Now, that limit moves to $200,000 and removes the 25% cap. This change is an attempt to help individuals reduce RMDs and provide income later in life – which can reduce the risk of running out of money in retirement.
- For individuals making Qualified Charitable Donations, starting in 2023, the $100,000 limit will be indexed for inflation. With these limits indexing, the recipient won’t be losing value from inflation. Also, for married couples, keep in mind that the limit is set on an individual basis, so each person can make QCDs as long as the individual’s total donations remain under the limit. Additionally, a once in life up to $50,000 QCD can now be made to a charitable gift annuity or a charitable remainder trust (CRUT or CRAT). Mostly likely, CRUTs will be the most efficient vehicle for this type of QCD as CRUTs can be funded over time whereas most CGAs and CRATs are funded at just on point in time.
As the SECURE 2.0 Act provisions take effect, we will hopefully see many businesses evaluating their retirement plans and trying to help their employees find ways to save for retirement, whether it’s creating a plan for the first time, taking advantage of new matching rules for student loans or adding auto enrollment (even though it’s only required for new plans).
This bill took steps toward helping the retirement income shortfall, but we are far from solving the problem.
The challenge for the next Congress will be to tackle bigger issues plaguing retirement security, like Americans not making enough to save for the future, the need for Social Security funding, Medicare reform and a robust long-term care solution.
For today, take advantage of the SECURE 2.0 Act provisions, encourage loved ones to do the same and, if you’re in a position to do so, offer avenues to save for retirement for employees.