What’s In The Secure 2.0 Act? What The Government Spending Bill Means For Investors And Retirement

Key takeaways

• SECURE 2.0 comes on the heels of the original SECURE Act passed three years ago, expanding retirement account types and eligibility.
• There are new rules for those approaching retirement age, including jumps in age requirements for required minimum distributions and maximum amounts for catch-up contributions.
• Other changes include 529 rollovers, employer-sponsored matches for student loan debt repayments, and automatic enrollment in 401(k) programs.

The SECURE Act passed in December 2019, making retirement savings easier. On Friday, December 23, 2022, Congress passed SECURE 2.0. This bill is headed to the White House for the president’s signature, and Biden has already indicated his approval.

There’s a lot in the SECURE 2.0 Act, covering everything from required minimum distributions to 529 rollovers. Regardless of your investment goals, there’s something in there that will affect your tax-advantaged investing accounts.

Here are some of the most significant changes.

New rules around required minimum distributions

Currently, you must start taking required minimum distributions (RMDs) at age 72. SECURE 2.0 changes that. Beginning on January 1, 2023, the new age for RMDs is 73. This age will be bumped progressively until it reaches 75, effective in 2033.

The penalty for not taking RMDs is also changing. Currently, if you fail to take RMDs, you will incur a 50% penalty. But, starting in 2023, the penalty falls to just 25%.

Plus, if you have a Roth account issued by your employer, you won’t have to worry about RMDs starting in 2024.

Jump in catch-up contributions

Right now, people age 50 and older can make catch-up contributions of $7,500 to their 401(k)s in 2023. The SECURE 2.0 Act bumps that up to $10,000 in 2025. However, this is only for those between 60 and 63.

What happens if inflation runs away again between now and then? Luckily, this provision allows the number to be adjusted for inflation. While it’s $10,000 in 2022 dollars, it might be higher if we don’t get inflation under control by 2025.

IRA catch-up contributions, which are currently $1,000 per year, will also be adjusted for inflation starting in 2024.

401(k) enrollment changes

SECURE 2.0 changes two big things regarding 401(k) enrollment. First, enrollment will be automatic with a minimum contribution of 3% effective 2025.

As an employee, you have the option to opt-out. This way, there’s less friction than the current opt-in model, hopefully getting more people to start investing for their golden years.

The other change is that part-time employees are eligible for 401(k)s sooner.

In the past, employers weren’t required to extend 401(k)s to employees who worked less than 1,000 hours. The original SECURE Act made them available to employees who worked 500 hours or more for three consecutive years, starting in 2021.

SECURE 2.0 sets the bar even lower, requiring only two consecutive years at 500 hours or more to be eligible for your employer’s 401(k) plans.

Roth accounts eligible for matching

Previously, you couldn’t get matching if your employer offered a Roth account as one of their retirement savings options. The SECURE 2.0 Act changes this, allowing employers to provide vested matching programs on Roth accounts.

Matching for student loan debt payments

Are you paying off student loan debt? Starting in 2024, the SECURE 2.0 Act allows your employer to match your debt payoff via employer contributions to your retirement account.

For example, if you pay off $500 of your student loan debt, your employer could contribute $500 to your 401(k). While this might not be that generous since it is a new offering, that’s the general concept behind the allowance.

This could have huge implications for student loan debtors because it eliminates the push and pull between paying off debt and saving for retirement. The change in this law will allow you to do both simultaneously.

529 Rollovers

529 accounts are used for college savings, but there’s always the back-of-your-mind concern that maybe the child you’re saving for won’t pursue higher education. This can leave you with a lot of money in a tax-advantaged account you can’t touch.

SECURE 2.0 allows you to roll the funds in a 529 account over to a Roth IRA after 15 years. The Roth IRA has to be for the beneficiary, and any rollovers will be subject to annual and lifetime contribution limits.

Increased age of onset for 529A plans

ABLE accounts, also known as 529A plans, allow disabled people to save in a way similar to 529 plans. However, withdrawals can be taken tax-free at any time as long as they are used for qualified disability expenses.

Since disability cannot be separated from the individual, most expenses the individual needs for day-to-day life count as qualified expenses.

While there is a cap on savings of $100,000 if you depend on SSI, the limits are less of a concern if you don’t. The lifetime contributions vary depending on the state but are usually over $500,000.

Currently, you can only invest in a tax-advantaged ABLE account if you were 26 or younger when you had the onset of disability.

The SECURE 2.0 Act raises the age of onset to 46, effective in 2026. If you are eligible for an ABLE account, you can use it to supplement your retirement savings without age restrictions on withdrawals.

Emergency Savings

If your employer offers a retirement account, they can allow you to contribute to a Roth for emergency savings, effective 2024. The maximum savings amount in a year is $2,500, and you can make four withdrawals yearly.

Your employer may or may not offer a match on these emergency savings.

The caveat is that you must be a non-highly compensated employee to use this. Nevertheless, this new provision could help households where one partner heavily outearns the other, with the lower-income earner taking advantage of the new Roth emergency savings account.

The bottom line

A lot in SECURE 2.0 can affect your long-term retirement savings and investing strategies, but almost all of these changes are positive.

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