The Secure Act 2.0, part of a $1.7 trillion spending package signed into law by President Biden, introduces significant changes to financial planning and retirement programs. These changes are designed to simplify saving for retirement and enhance retirement prospects. Here are the key provisions of the Secure Act 2.0:
1. Workplace plans
Starting in 2025, employers offering new 401(k) or 403(b) plans must automatically enroll employees, with some exceptions. Small businesses can receive tax credits to establish retirement savings plans, and non-highly compensated employees can be enrolled in a $2,500 “rainy day” savings plan linked to a 401(k). Employers can also make matching contributions to retirement plans for qualified student loan payments.
2. Individual changes
The law allows individuals who have fallen behind in retirement savings to catch up by making larger contributions later in life. In 2023, individuals aged 50 and older can contribute an extra $7,500 annually to their retirement accounts. This catch-up contribution limit will increase to $10,000 in 2025 for savers aged 60 to 63.
3. Changes for seniors
The age for taking Required Minimum Distributions (RMDs) from retirement accounts will rise from 72 to 73 in 2023 and then to 75 in 2033. This provides individuals with more time to keep their money invested before being obligated to withdraw and pay taxes on non-Roth IRA accounts. Congress has also reduced the penalty for missing an RMD deadline.
4. Eased early withdrawal penalties
The new law expands exemptions to the penalty for early withdrawals from retirement accounts. Penalties are waived for specific groups, including private-sector firefighters, public safety officers, terminally ill individuals, those facing personal or family emergencies, victims of domestic abuse, individuals paying long-term-care premiums, and those affected by federally declared disasters.
5. Help with finding lost retirement accounts
The law mandates the creation of a searchable database to assist individuals in locating lost retirement accounts, especially when changing jobs and forgetting about previous savings accounts.
6. Changes to Roth 401(k) rules
Starting in 2024, the pre-death distribution requirement for Roth 401(k) accounts will be eliminated. Employers can offer Roth matching contributions, allowing employees to choose to pay taxes upfront and later withdraw the contributions and potential earnings tax-free.
7. Retirement-savings help for lower-income individuals
Beginning in 2027, the Secure Act 2.0 replaces the nonrefundable Saver’s Credit with a federal matching contribution for certain IRA and retirement plan contributions. The match will be 50% of contributions up to $2,000 per person, subject to income limits.
These changes, coupled with others such as increased amounts for qualified longevity annuity accounts and simplified rollovers of college savings into beneficiary’s Roth IRA accounts, aim to enhance retirement options and savings opportunities for individuals.
Consulting a financial advisor is recommended to fully understand and maximize the benefits provided by the Secure Act 2.0.