How SECURE 2.0 could help you save more for retirement
SECURE 2.0 is an update to a law passed in 2019 designed to help improve America’s retirement system. The Act contains 90 provisions that aim to make it easier for businesses to offer retirement plans and lessen the burden of managing them. But SECURE 2.0 doesn't just impact businesses, it introduces many provisions to help savers like you plan for the future.
There’s a lot of complexity when it comes to SECURE 2.0. While many provisions are required, others are optional and at the discretion of your retirement plan provider. Since the law just recently passed, most providers are still deciding what optional features they’ll adopt and by when.
At a high level, here are a few of the key changes that could impact you and your retirement goals over the next few years:
- Effective now: The age for required minimum distribution has increased, the penalty for failure to take required minimum distributions has decreased, and student loan payments can be eligible for matching contributions.
- Coming in 2024: College saving accounts will be eligible to be rolled over into Roth IRAs.
- Coming in 2025: Savers ages 60 to 63 will be eligible to contribute even more to their retirement accounts.
- Coming in 2027: Low income earners will receive up to $1,000 from the government into their retirement account, if they contribute up to $2,000.
Below, we’ll take a deeper look into these provisions and what they might mean for you:
The age for required minimum distribution has increased to 73
What this means: At a certain age, you must start withdrawing a minimum amount of money from specific retirement accounts, including 401(k) and traditional IRAs. This is known as a required minimum distribution (RMD). With SECURE 2.0, the age increases from 72 to 73 in 2023.
Who this impacts: Savers approaching RMD age
How this might impact you: The IRS says the RMD rule is in effect to ensure you spend your retirement savings during your lifetime and not for estate planning purposes by transferring savings to beneficiaries. These new age limits consider that people are living longer, which means you won't be required to withdraw money too early if you're not ready to retire or don’t yet need the funds.
The penalty for failure to take required minimum distributions has decreased to 25%
What this means: If you don't take your full RMD by the deadline, you will have to pay penalties. The penalty has been lowered from 50% of the missed RMD to 25%. It may be reduced to 10% if you can explain the mistake and take steps to fix it.
Who this impacts: Anyone subject to RMD rules that does not take their full RMD
How this might impact you: While you'll still have to pay the penalty if you miss taking your appropriate RMD, the penalty amount will be lower, hopefully lowering your overall tax bill.
Employers can contribute to your retirement savings on a Roth basis
What this means: Before SECURE 2.0, employer contributions could only be made on a pre-tax basis. But a new provision allows employer contributions to be made to 401(k) plans on a Roth (after-tax) basis. If your employer decides to offer this option in your 401(k) plan, you can now choose to pay taxes up front on your employer’s match or profit share, and have the money come out tax-free in retirement.
Who this might impact: Anyone who has a 401(k)
How this might impact you: At a high level, this allows savers like you more flexibility in choosing which tax advantages to use for your retirement portfolio. (Note that more guidance from the IRS and Department of Labor is needed to fully understand how to account for taxes on employer contributions made on a Roth basis.)
Student loan payments are now eligible for matching contributions
What this means: Under a new provision, employers can choose to offer their retirement plan match to employees who are making qualified student loan payments.
Who this might impact: Anyone with student loans that is saving for retirement with a 401(k), 403(b), 457(b), or SIMPLE IRA
How this might impact you: Before this, you may have had to choose between paying off student loan debt or saving for retirement when income is tight. More importantly, many people miss out on their employer's match, which is part of your overall benefits and wages. Not taking advantage of your employer's match is like not taking the total compensation that's offered to you. With this new provision, you may have the opportunity to choose both.
People over 50 who earn over $145,000 will have to make catch-up contributions on a Roth basis
What this means: Catch-up contributions allow 401(k) plan participants 50 or older to make additional contributions, on top of the annual deferral limit for 401(k) accounts. These extra contributions help those nearing retirement "catch up" and set aside more money.
Starting in January 2024, people who earn more than $145,000 (as indexed) and make catch-up contributions will have to make those contributions on a Roth basis, which are deposited after-tax, grow on a tax-deferred basis, and are generally withdrawn at retirement tax-free (assuming a qualified withdrawal). (Note that only the catch-up contribution portion needs to be made on a Roth basis.)
Who this might impact: 401(k) participants 50 or older earning at least $145,000
How this might impact you: Roth 401(k) contributions have only become more common recently. If you’ve never made contributions on a Roth basis before and you are subject to this requirement, you’ll now have two types of retirement savings. The first will be pre-tax (or traditional), which you will owe income tax on in the year you withdraw. You will also now have Roth (after-tax) funds, which will be tax-free as long as the withdrawals are made five years after the first deposit and a qualifying event such as after age 59 ½. You can learn more about the differences between traditional and Roth 401(k) contributions on our blog.
529 college savings accounts will be eligible to roll over to Roth IRAs
What this means: A 529 plan, often called a college savings account, is a tax-advantaged savings plan used to pay for education expenses. Typically, a parent owns the account and their child is the beneficiary. Beginning January 2024, 529 beneficiaries can roll up to $35,000 to a Roth IRA from a 529 college savings account as long as it has been open for over 15 years and the beneficiary has earned income. Additionally, contributions or earnings made within the past 5 years are not eligible to be converted.
Who this impacts: Beneficiaries of 529 college savings accounts
How this might impact you: In the past, account holders faced taxes and penalties for non-qualified withdrawals. Under this provision, beneficiaries can still receive the tax benefits of 529 plans, even if they don't use all the available funds on education, and can even get a head start on retirement.
Roth 401(k) accounts will no longer have required minimum distributions
What this means: Roth IRAs have never been subject to RMDs, but other Roth accounts, such as Roth 401(k)s, have. But beginning January 2024, such Roth accounts will no longer be subject to RMDs.
Who this impacts: Roth 401(k) account holders
How this might impact you: This new rule puts Roth 401(k)s on a more even playing field with Roth IRAs. If, for example, you have funds in a Roth 401(k) account, you are not required to take an RMD on this amount anymore simply due to it being invested in a 401(k).
Higher catch-up contributions for those ages 60-63
What this means: As we explained earlier, catch-up contributions are additional contributions you can make if you're 50 or over to save more for retirement. These contributions will now need to be made on a Roth basis if you don’t meet certain income requirements.
Also beginning in January 2025, people 60 to 63 can contribute even more to their retirement accounts. The new catch-up contribution rate for this age group will be whichever is greater: $10,000 (as indexed), or 150% of the normal catch-up rate, which the IRS may adjust for inflation each year. Everyone else 50 and older, who is eligible for catch-ups, will be subject to the standard limit.
Who this impacts: People ages 60 to 63 who have qualified retirement accounts
How this might impact you: As you near the expected retirement age, the federal government will allow you to add an additional, tax-advantaged boost to your retirement savings.
Earn an additional $1,000 tax credit with Saver’s Match
What this means: Currently, low-income earners who contribute to retirement accounts are eligible to receive a maximum tax credit of $1,000 if they contribute up to $2,000 to a retirement account, such as an IRA or a 401(k). This is called the Saver's Credit, which will become the Saver's Match beginning January 2027.
Who this impacts: Eligibility for the Saver's Match is based on how you file your taxes and how much income you earn each year:
- If you're single (or married but filing taxes separately), you'll be eligible if you earn between $20,500 and $35,500.
- Head of household filers will qualify if they earn between $30,750 and $53,250.
- If you're filing a joint return, you'll be eligible if you made between $41,000 and $71,000.
Here's how it will work: Instead of claiming the credit directly on your tax return, if you qualify, you will receive the money as a match that will be deposited by the federal government directly into your retirement account. This match can't be withdrawn without penalties, including repayment to the Treasury Department in some cases.
How this might impact you: Currently, most people who qualify for the credit don't claim it or don't even know they are eligible for it. Additionally, many of those who do claim it do not get the full $1,000 credit since their total tax bill is less than that. With this match, you will generally get the full amount regardless of the taxes you may owe. This match is a great way to help you save more for retirement and take full advantage of the program's tax credits.
These are just a few key provisions that could impact your retirement savings strategy. We'll update our blog as more details become available in the coming months.
The information provided in this article is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.