Secure Act 2.0 Changes

Understanding Secure Act 2.0: Key Changes and How They Affect Your Retirement Planning

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0, signed into law as part of the broader legislative package at the end of 2022, introduces significant updates to the ways Americans can save for retirement. Building on the original SECURE Act of 2019, this new legislation includes several changes designed to enhance retirement savings, increase access to retirement plans, and provide more flexibility. Here’s what you need to know about the key provisions of SECURE Act 2.0 and how they might impact your retirement strategy.

Expanded Retirement Plan Access

One of the central goals of SECURE Act 2.0 is to expand access to retirement plans, especially for small business employees and part-time workers. Long-term, part-time workers now have greater access to their employer’s 401(k) plans, with the required service time for eligibility reduced significantly. The act also makes it easier for small businesses to join multiple employer plans (MEPs), reducing administrative costs and encouraging more employers to offer retirement benefits.

Increased Catch-Up Contributions

Under current law, individuals who’ve attained age 50 and older can make higher catch-up contributions to retirement accounts than would otherwise be permitted by plan limits. Starting in 2025, Section 109 increases these limits for 401(k) and 403(b)participants to the greater of $10,000 or 50 percent more than the regular catch-up amount for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025. This provision is a substantial boost for those nearing retirement, providing an opportunity to significantly increase their retirement savings later in life.

Automatic Enrollment

SECURE Act 2.0 encourages employers to automatically enroll new employees in their 401(k) plans, a change aimed at increasing employee participation rates in retirement savings. While employees can opt out of this automatic enrollment, the initial contribution rate must be at least 3% but no more than 10%, and thereafter, it will increase annually until it reaches between 10% and 15% unless the participant opts out and/or chooses other contribution levels.

Matching Contributions for Student Loan Payments

In an innovative move to help younger workers save for retirement while paying off student loans, SECURE Act 2.0 allows employers to make matching contributions to retirement plans based on the employee’s student loan payments. As an example, if an employee is paying down student loans in place of contributing directly to a retirement plan, the employee can still receive matching retirement funds from their employer into the qualified retirement plan. While this feature may now be an option for those making student loan payments, the match is not required to be offered by the employer.

RMD Age Increase

The required minimum distribution (RMD) age continues to rise, giving retirees more control over their tax burdens. Under the new law, the RMD age will incrementally increase from 72 to 75 by 2033. As of 2023, the RMD age is currently age 73. On average, people are living longer than they used to given continued advances in medicine. This change allows more time for retirement accounts to grow before mandatory withdrawals begin, potentially reducing the total tax liability over the lifetime of the retiree.

Penalty-Free Withdrawals

SECURE Act 2.0 introduces new circumstances under which penalty-free withdrawals from retirement accounts are permitted. These include exceptions for individuals facing terminal illness, victims of domestic abuse, and those experiencing financial hardships due to disasters.

In addition, Section 127 provides employers the option to offer non-highly compensated employees’ pension-linked emergency savings accounts. These emergency savings accounts can not be standalone accounts. Employers may automatically opt employees into these accounts at no more than 3 percent of their salary The portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer). Once the cap is reached, additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap. Contributions are made on a Roth-like basis and are treated as elective deferrals for purposes of retirement matching contributions with an annual matching cap set at the maximum account balance – i.e., $2,500 or lower as set by the plan sponsor. The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or IRA.

What This Means for You

The changes introduced by SECURE Act 2.0 provide more ways to save for retirement and offer flexibility in how those savings can be used. For many, these provisions will require a reevaluation of their current retirement strategies. It's advisable to consult with a financial advisor to understand how these changes affect your individual situation and to adjust your retirement planning accordingly.

SECURE Act 2.0 represents a significant shift in retirement policy aimed at increasing the overall retirement readiness of Americans. Whether you're just starting out, nearing retirement, or somewhere in between, these changes can provide new opportunities to secure your financial future.