What is SECURE Act 2.0?
Did Congress save room for seconds?
You bet they did.
On December 23, Congress officially passed the SECURE 2.0 as part of a $1.7 trillion omnibus spending package. The bill was signed into law by President Biden on December 29, 2022. The legislation is aimed at helping Americans better prepare for their financial future while strengthening the retirement system as a whole for both employers and employees.1
The policy, which includes a provision to expand automatic enrollment in retirement plans, builds on the original SECURE Act — the Setting Every Community Up for Retirement Enhancement Act — from 2019.
Read on to learn more about SECURE Act 2.0 and how it could impact you, your money and your financial confidence.
What is SECURE Act 2.0?
Overall, SECURE Act 2.0 is designed to enhance the retirement savings experience for working Americans. Some of its key elements focus on incentivizing people to save more and prioritize long-term goals.2
What’s in SECURE Act 2.0?
With so much to unpack, we’ll keep everything high level and highlight some of the measure’s most critical features.
EXPANSION TO AUTOMATIC ENROLLMENT
This is a big one.
SECURE Act 2.0 requires employers* who establish a new 401(k) or 403(b) plan (after the date the law is enacted) to automatically enroll all new employees. They must be enrolled at a rate of at least 3%, which would increase annually until they reach at least 10%. Workers have the option to opt out or choose a lower or higher deferral rate that fits their needs.
* New businesses (three years or younger) and small employers (10 or fewer staff members) would be excluded. As mentioned, plans in existence as of December 29, 2022, are grandfathered and are not subject to this provision.
CHANCE TO PLAY MORE CATCH UP
Under SECURE Act 2.0 you’ll have more room to play catch up if you’re nearing retirement. Right now, people who are 50 and older can save an extra $7,500 in catch-up contributions (for 2023) in most retirement plans.
But beginning on January 1, 2025, the amount savers ages 60 to 63 will be able to sock away is the greater of $10,000 or 150% of the current catch-up limit .3
Under the new law, beginning in 2024, catch-up contributions will have to be made on a Roth basis, unless you earn $145,000 or less.
RAISING THE RMD AGE
SECURE Act 2.0 raised the required minimum distribution (RMD) age (which is when workers must begin taking withdrawals from their retirement account) from 72 to 73. And it even goes a few steps further: The RMD age will increase to 75 in 2033.4
In addition, SECURE Act 2.0 also reduces the tax for failure to take an RMD from 50% to 25% (and potentially even 10% in certain instances) of a missed RMD.
HELP WITH STUDENT LOANS
Many borrowers choose paying back their debt over saving for retirement. Under SECURE Act 2.0 they may not have to make a choice. SECURE Act 2.0 allows companies the option to match student loan payments at the same rate as regular elective deferrals and deposit their matching contribution into the employee’s retirement account.5
FLEXIBILITY IN 457(B) PLANS
For those in a 457(b) plan, SECURE Act 2.0 eliminates the “first day of the month” stipulation that obligates individuals to make a deferral election prior to the beginning of the month for it to become effective.6
Because things don’t always go as planned, there is now a plan in place to help people who may need some extra cash. Today when faced with an emergency, many people apply for a loan, take a hardship withdrawal or use a credit card. Those options can come with penalties, loss of potential growth or high interest rates.
SECURE Act 2.0 will give companies the option to offer an emergency savings account as part of their 401(k) program. If provided, employees would be able to access the account at least once a month to cover unforeseen expenses — without incurring any taxes or penalties. Participants can contribute until the account reaches a balance of $2,500. If the plan provides for matching contributions, these emergency savings contributions would be eligible for a match as well.7
PERKS FOR PART-TIME WORKERS
The sooner, the better.
Part-time employees won’t have to wait as long to save under SECURE Act 2.0. Starting January 1, 2025, long-term, part-time workers will become eligible to enroll in their employer’s retirement plan after two years instead of the previous three-year requirement. According to current law, a “long-term part-time” employee is anyone who has worked at least 500 hours over three consecutive years.8
BENEFITS FOR SMALL BUINESSES
Small businesses would benefit in big ways. Existing start-up credits are expanded and a new tax credit would help some small employers offset company contributions.
IMPROVEMENTS TO SAVER’S CREDIT
The saver’s credit is a tax credit for middle- to low-income earners who are contributing to their retirement accounts. Created in the early 2000s, the saver’s credit provides people who fall below certain income levels with a greater incentive to build their nest egg by providing a credit that reduces the amount of taxes you may owe.10
SECURE Act 2.0 expands the existing saver’s credit and pays it as a federal match to a retirement plan account or an IRA. The federally funded match is up to 50% of applicable contributions (capped at $1,000) for individuals who fall below certain income levels.11
One important item to note relates to the effective dates. When the original SECURE Act was passed in late December 2019, many of the provisions became effective days later, at the beginning of 2020. Under SECURE 2.0, many effective dates for the more complex provisions are pushed out to 2024 or beyond.
Of course, SECURE Act 2.0 is a comprehensive bill and entails much more than what is listed and described above. For a more detailed analysis of SECURE Act 2.0, contact your financial advisor or visit www.congress.gov.
1 Yahoo Finance, “The SECURE 2.0 Act and Your Retirement Savings: Expect to See These Big Changes,” December 2022.
2 CNBC, “‘Secure 2.0’ is part of the $1.7 trillion spending bill, putting it on track to usher in retirement system improvements,” December 2022.
3 The White Coat Investor, “Secure Act 2.0 — Here’s What You Need to Know,” December 2022.
4 Kiplinger, “New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More,” December 2022.
5 Forbes Advisor, “Could SECURE Act 2.0 Fix The Retirement Crisis?,” March 2020.
6 The White Coat Investor, “Secure Act 2.0 — Here’s What You Need to Know,” December 2022.
7 Sunny Day Fund, “HR and People Ops Guide to the SECURE Act 2.0 in 2023,” December 2022.
8 NASDAQ, “These Are The Biggest Changes To Retirement Plans Under SECURE Act 2.0,” December 2022.
9 Forbes Advisor, “Secure Act 2.0: Will It Help You Save For Retirement?,” December 2022.
10 Smart Asset, “The Saver’s Credit: 2022 Rules and Income Limits,” December 2021.
11 Kiplinger, “Retirement Saver's Tax Credit Converted to "Saver's Match",” December 2022.
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