Key Retirement Planning Changes in SECURE Act 2.0
President Biden recently signed the latest version of the SECURE Act into law as part of an omnibus spending bill. The previous version of the act made significant changes in retirement planning, such as postponing the age for required minimum distributions (RMDs) to start. However, with 90 provisions that impact retirement, SECURE Act 2.0 arguably assists even more Americans in planning for their retirement.
This article focuses on some of the most significant changes. It is important to note that the specifics of the legislation are still being determined, and the rules may change. Therefore, it is advisable to consult with a financial advisor before making any changes to your retirement plan.
Catch-up Contributions
If you are 50 or older, you may already be taking advantage of catch-up contributions for your 401(k) or other workplace retirement plan. For instance, the standard contribution limit for 2023 is $22,500, but if you’re 50-plus, you can contribute an additional $7,500.
Starting January 1, 2025, you can make an additional $10,000 catch-up contribution per year (adjusted for inflation) to your employer-sponsored retirement plan if you’re between 60 and 63.
However, some high-income earners will need to make their catch-up contributions into a Roth account. As this Fidelity article reports, if you earn more than $145,000 in the previous calendar year, any catch-up contributions must be made using after-tax dollars into a Roth plan.
Under SECURE Act 2.0, catch-up contributions for IRAs will also increase. Currently, individuals age 50 or older can make a catch-up contribution of $1,000 to their IRA. Starting in 2024, this amount will be indexed to inflation, meaning it may increase from year to year. This change can help older individuals catch up on missed savings opportunities.
Roth Account Matching
Previously, employers could make matching contributions to only pre-tax accounts. Under SECURE 2.0, your employer’s matching contributions can now be deposited into a Roth account, potentially giving you greater tax flexibility in retirement.
Roth RMDs
Under the SECURE Act 2.0, employer-sponsored Roth 401(k)s, 403(b)s, and 457(b)s will no longer be subject to required minimum distributions starting in 2024. This change brings them in line with Roth IRAs, which do not have RMDs.
RMD Age
The age at which required minimum distributions must begin is being pushed back under the SECURE Act 2.0. Previously, RMDs were required starting at age 72, but under the new legislation, that age increases to 73 in 2023. The age increases to 75 in 2033.
This change applies to a variety of retirement accounts, including 401(k) and 403(b) plans, traditional IRAs, SEP and SIMPLE IRAs, rollover IRAs, and most small business accounts.
RMD Penalty
The penalty for failing to take a required minimum distribution (RMD) has been reduced under SECURE Act 2.0. The penalty for not taking an RMD used to be 50% of the RMD amount not taken, but under the new law, it drops to 25% of the amount not taken.
Additionally, if the RMD is corrected in a timely manner, the penalty will be further reduced to 10%.
Automatic Enrollment
The SECURE Act 2.0 aims to increase participation in retirement plans by requiring new plans launched after December 29, 2022, to automatically enroll eligible employees. This means that instead of opting in to a 401(k) or 403(b) plan when starting a new job, you will need to opt out if you don’t want to participate.
Starting in 2025, these plans will also automatically enroll new employees at a minimum contribution rate of 3%.
Part-Time Employees
In addition, the SECURE Act 2.0 requires employers to offer 401(k) plans to long-term, part-time employees who have worked at least 500 hours per year for two consecutive years.
This change could help part-time workers plan for their retirement and give them a better chance to save for their future. This provision takes effect starting in 2025, giving employers time to adjust their plans accordingly.
529 Plans
The 529 plan, typically used for college expenses, has long presented a problem for owners once beneficiaries have completed their education. Withdrawals unrelated to education have resulted in a 10% penalty and taxes.
SECURE Act 2.0 addresses this issue by allowing plan owners to roll over their assets tax-free and penalty-free into a Roth IRA for the beneficiary. However, certain conditions must be met before making the rollover, such as the account being at least 15 years old, not exceeding the Roth IRA’s annual contribution limit, and having a lifetime rollover limit of $35,000.
Final Thoughts
The SECURE Act 2.0 provides new opportunities for retirement savers to save more and plan for the future. It’s recommended to speak with a financial advisor to understand how these changes can be incorporated as part of your overall retirement strategy.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was generated using artificial intelligence (ChatGPT) and edited by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.