Secure 2.0 And Its Future Impact

“SECURE 2.0” is a provision signed by President of America, Joseph R. Biden, on December 29, 2022 to improve Americans' financial security. The legislation builds on the SECURE Act 2019 and includes recommendations of BPC’s Commission on Retirement Security and Personal Savings. In this article we will highlight a few key pointers of SECURE Act 2.0. 

Key Highlights of SECURE ACT 2.0:

1. Raising the starting age for RMDs:

A threshold age will be added to traditional IRAs and workplace retirement plans on Jan. 1, 2023, determining when individuals must take required minimum distributions (RMDs). As a result, individuals can wait until April 1, following the year they turn 73 before taking their first RMD. RMDs must be received by December 31 each year from that point forward.

From January 1, 2033, RMD thresholds will rise to 75. From 2023 onward, the penalty for not taking RMDs on time is reduced by half, from 50% to 25% of the undistributed amount.

2. Higher catch-up contributions:

As of January 1, 2025, individuals aged 60 through 63 may make catch-up contributions of up to $10,000 per year to a workplace plan, and these contributions will be indexed for inflation. People who are 50 and older will be able to catch up in 2023 with a catch-up amount of $7,500.

At age 50 or older, all catch-up contributions to a Roth account must be made after-tax if you earned over $145,000 the previous year. Inflation-adjusted earnings of $145,000 or less will be exempt from Roth requirements.

Older Americans aged 50 and over can make $1,000 catch-up contributions to their IRAs. The limit will increase each year according to cost-of-living increases determined by the federal government starting in 2024.

3. Matching for Roth accounts:

Employers can offer vested matching contributions to Roth accounts at the request of employees (although payroll systems may need to be updated to accommodate this). The matching in employer-sponsored plans was previously done pre-tax. Roth retirement plans allow contributions to be made after tax and earnings to grow tax-free afterward. It is important to know that RMDs for Roth accounts from an employer-sponsored plan are required until 2024, unlike Roth IRAs. 

4. Qualified charitable distributions (QCDs):

A charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity may be selected as part of a one-time gift to an individual over the age of 7012 beginning in 2023. An expansion of the types of charities eligible for a QCD has been announced. RMDs on this amount is included in the annual calculation, if applicable. It is important to note that your gifts must come directly from your IRA by the end of the calendar year to count. It is not possible to donate to all charities through QCDs.

5. Other changes for annuities:

The popularity of qualified longevity annuity contracts (QLACs) is rising. A QLAC is a deferred income annuity purchased with retirement funds typically held in a 401(k) or IRA that begins payments before age 85. From January 1, 2023, premiums will be limited to $200,000 instead of $145,000. Additionally, the law eliminates a restriction limiting premiums to 25% of retirement account balances.

6. Automatic enrollment and automatic plan portability:

In 2025, the legislation requires employers to automatically enroll eligible employees in new 401(k) and 403(b) plans with a minimum contribution rate of 3%. In addition, retirement plan service providers can now offer plan sponsors automatic portability services that allow employees to transfer low-balance retirement accounts when they change jobs. As a result, saving in another qualified retirement plan instead of cashing out a retirement plan after leaving a job may benefit those with low-balance retirement accounts.

7. Emergency savings:

A Roth account designated for non-highly compensated employees is eligible to accept participant contributions for defined contribution retirement plans starting in 2024. The first four withdrawals in a year would be tax and penalty-free, and contributions would be limited to $2,500 yearly (or less if set by the employer). Contributions may qualify for employer matching, depending on the plan rules. Besides allowing plan participants to access funds without penalty, an emergency savings fund could also encourage them to save for short-term and unexpected expenses.

8. Student loan debt:

Employers will match employee student loan payments with matching contributions to retirement accounts starting in 2024, giving workers another incentive to save.

9. 529 Plans:

In addition to annual Roth contributions limits, there is an aggregate lifetime limit of $35,000 when 529 assets are rolled over to a Roth IRA for the beneficiary after 15 years. Before the end of the 5 years following the distribution, the aggregate amount of rollovers cannot exceed the distribution amount. As long as the rollover does not exceed the annual Roth IRA contribution limit, it is treated as a contribution.

Wrapping Up:

With SECURE 2.0, millions of Americans will have a better chance of retirement success, and employers will be able to attract and retain talented employees. In addition, with increased Roth opportunities, employees can save more through catch-up contributions, receive matching loan repayments, and maximize retirement savings through catch-up contributions.