SECURE Act 1.0 (an acronym for Setting Every Community up for Retirement Act of 2019) expanded access to retirement plans and included provisions intended to help employees save for retirement.
SECURE Act 2.0 expands upon the foundation established by SECURE Act 1.0 and adds a number of provisions (more than 100!) that provide additional benefits for a range of employees.
By some estimates, SECURE Act 2.0 will add $40 billion to retirement plan savings over the next decade.
Here’s a summary of these benefits. Savvy employees can use this information to help secure their retirement, especially if they are participating in 401(k), 403(b), IRA and Roth accounts.
Secure 2.0 Provisions and Benefits
1. Enrollment
According to the U.S. Bureau of Labor Statistics, in March 2021, 68% of private industry employees had access to retirement benefits through their employer, but only 51% chose to participate.
A key provision of SECURE Act 2.0 will help close this gap.
Employers can initiate automatic enrollment of employees in defined contribution plans (like 401(k) and 403(b) plans). Initially, the employee’s contribution will be a minimum of 3%, but it may increase annually to at least 10%, up to a cap of 15%.
Employees can still elect to decline to participate in the plan.
Employers have more options to encourage enrollment in the plan, like offering participants gift cards and other incentives of modest value.
2. More inclusion
SECURE Act 2.0 expands those who can participate in retirement plans to include part-time employees, commencing in 2025. Employees with two consecutive years of employment are eligible if they worked 500 hours per year.
Under prior law, these employees couldn’t participate in retirement plans unless they were employed for a minimum of 500 hours for three consecutive years.
3. Student loan relief
Historically, those with student loans often deferred contributions to retirement plans until they paid off their student loan debt.
Under SECURE Act 2.0, starting in 2024, employers can make “matching contributions” to the retirement plan accounts of these employees, up to the amount of student loan debt repaid each year, even though the employee made no contribution to the plan.
4. 529 plans
A 529 plan is an investment account used to fund the education of a minor. If the fund is used for “qualified education expenses,” the money in the fund grows tax-free and isn’t taxed when the proceeds are used for these expenses.
SECURE Act 2.0 provides that, starting in 2024, if funds are remaining in a 529 plan, you can rollover up to $35,000 into a Roth IRA.
To qualify, the 529 plan has to be in place for a minimum of 15 years. The funds must be transferred to a Roth IRA in the name of the beneficiary of the 529 plan. Contributions to the 529 plan in the previous 5 years (including earnings on those contributions) can’t be included in the rollover.
Finally, the amount rolled over must be within annual IRA contribution limits.
5. Expansion of Roth IRAs
If your employer offers a Roth 401(k) and matches contributions, there was no way (prior to SECURE Act 2.0) those contributions could be directed to your Roth 401(k) account.
Starting in 2023, that’s changed. Matching contributions can be directed into your Roth 401(k) account, although the amount of those contributions will be considered taxable income.
Another provision of SECURE Act 2.0 eliminates the minimum required distributions for Roth 401(k) plans.
6. A “Saver’s Match”
Lower-income employees may qualify for a contribution by the federal government of up to $2000 a year, starting in 2027.
These funds will be deposited directly into your retirement account.
The match is 50% of your contribution, but it gets phased out as your income increases.
7. Required minimum distributions (RMDs)
Starting in 2023, the age you must take RMDs increased from 72 to 73. It continues to gradually increase until 2033. At that time, you won’t have to take RMDs until you are age 75.
This benefit doesn’t come without potential negatives requiring careful tax planning.
By deferring RMDs, the account could increase in value, making more of your Social Security benefits taxable and potentially increasing the surcharge for those with higher incomes on Medicare premiums.
To mitigate these issues, consider reducing the amount in your IRA subject to RMDs by doing the following: :
- If you are 70 ½ or older, consider a direct contribution to a charity from your IRA, up to the annual limit of $100,000, indexed for inflation.
- Beginning in 2023, you can make a one-time $50,000 qualified charitable distribution directly from your IRA to certain charitable remainder annuity trusts, charitable remainder unitrusts, and charitable gift annuities. The $50,000 is part of the $100,000 annual limit.
8. Expansion of catch-up contributions
Starting in 2025, plan participants aged 60-63 can contribute an additional $10,000 (inflation-adjusted), up to 15% of their eligible salary, to their retirement plan.
If you earn more than $145,000 annually, your catch-up contributions have to be made to a Roth IRA (which is after-tax).
9. Emergency funds
According to one study, 56% of Americans can’t cover a $1000 emergency expense. It’s unrealistic to expect these people to participate in a retirement plan.
Help is on the way.
The SECURE Act 2.0 permits (starting in 2024) linking emergency savings accounts to retirement plans.
The account would be capped at $2500. The funds must be invested in assets where the principal is protected if held to maturity, and interest is paid on the underlying asset.
Employers cannot contribute to this account.
Withdrawals are permitted at least once a month. If withdrawals are required outside of these limitations, SECURE Act 2.0 provides a simple self-attest from the participants stating they meet the necessary hardship requirements. Participants could withdraw up to $1000 yearly to pay for an emergency.
Contributions must be made to a Roth account and are taxed before deposit.
Employees deemed “highly compensated” by the IRS are not eligible to participate in these accounts.
The SECURE Act 2.0 has other benefits, including a reduction in the penalty for failing to take an RMD. The current penalty is 50% of the amount not taken. Under the new law, it’s reduced to 25% and falls further for IRAs to 10% if timely corrected.
Whether you reach age 73 in 2023, are just starting your career, have student loan debt, or want to fund a 529 plan for a loved one, there’s something in SECURE Act 2.0 you should know about.
A financial advisor – particularly one who is also a certified public accountant – can help you maximize the benefits of this new legislation.
