The Secure 2.0 Act

The SECURE 2.0 Act made many changes to retirement savings, making it easier and more motivating for people to save for retirement.Some changes are immediate, and others occur in the next couple of years. Here’s how the SECURE 2.0 Act may help you.

What is the Secure 2.0 Act?

The SECURE 2.0 Act became law in late 2022, making many changes to the current SECURE Act, which was signed in 2019. The SECURE Act rules how you can save (and use) your retirement funds.The SECURE 2.0 Act made changes to retirement and savings rules to make the rules more flexible and potentially make it easier to save for retirement.Almost everyone will be affected by the changes. Here are the most significant changes.

Required Minimum Distribution Changes

The RMD changes increased the age that you must take the required minimum distributions from traditional IRAs from 72 to 73. This means you can wait until April 1 of the year after you turn 73 to take your first distribution. From there, you must always take a distribution by December 31 of each year.Another change is the penalty charged for not taking RMDs. Individuals will now pay 25% of the undistributed funds rather than the previous 50% penalty. The delay in RMDs allows you more time to grow your funds tax-deferred. It also allows more time to do Roth conversions if you’re eligible to convert your traditional IRA to a Roth IRA for more tax savings.However, there’s a downside. You will need other assets to supplement your income while you aren’t withdrawing funds from your retirement account. So it requires more careful financial planning to make it happen.

Roth Contribution Limits

Before the SECURE 2.0 Act, employees didn’t have the option to have employer-matching contributions sent to their Roth plan. However, the new plan allows individuals to choose this option giving more tax-free income during retirement.If you choose to send your employer contributions to your Roth account, they will become a part of your taxable income because Roth contributions are after-tax. The SECURE 2.0 Act also eliminates RMDs for workplace Roth accounts, but this begins in 2024.

Higher Catch-Up Contributions

Before the SECURE 2.0 Act, people aged 50 and older could only contribute an additional $1,000 to their retirement account annually. With the new laws, catch-up contributions increase starting in 2025 to $10,000 or 50 percent of the standard catch-up amount, whichever is greater. This applies to anyone ages 60 – 63 years old.Also, all catch-up contributions will be after-tax, so you won’t get the tax benefits when you contribute unless you earn $145,000 or less yearly.These changes will increase the ability to save by deferring more money for retirement. It may also decrease your tax bracket by deferring more funds to retirement if you make $145,000 or less per year.

Auto Enrollment in 401Ks

As of right now, employers can offer automatic enrollment in their 401K plan, but they aren’t required to do so. With automatic enrollment, employees are automatically enrolled in the company’s 401K unless they opt-out.The SECURE 2.0 Act ensures that all major employers must have automatic enrollment in their 401K plan.Companies can automatically defer the amount between 3 – 10% of each employee’s income. Employees aren’t required to participate, but it may increase the number of people who participate and save for retirement. Being automatically enrolled eliminates the extra step required to sign up for the company’s 401K. More employees may be willing to save for retirement when it’s done for them.Certain companies are excluded from this law, including companies with fewer than ten employees and those in business for fewer than ten years.

529 Rollovers to Roth IRA

Typically, any 529 savings plan funds not used can be withdrawn and used for other purposes but face a 10% penalty plus income taxes. However, in 2024, you can roll over your unused 529 funds into a Roth IRA.There are a few provisions, though.You can roll over up to $35,000 in your lifetime and only funds in a 529 plan for at least 15 years. The funds must also be rolled over into a Roth IRA in the same name as the beneficiary of the 529 savings plan funds.Any funds deposited in the last five years and any earnings on those funds cannot be rolled over, and the rollover amount must fall in line with the current year’s IRA contribution limits.This new law motivates more people to use the 529 plan, getting the state income tax deduction (if applicable) and the ability to get tax-free funds through conversion in the future.

Retirement Plan Contributions for Employees with Student Loans

Many employees with student loans forgo the 401K contributions to pay off their student debt. However, the SECURE 2.0 Act allows employers to contribute to employees’ 401K accounts with student loan debt, even if they don’t make contributions.The amount an employer can contribute equals the amount of student loan debt the employee repaid that year.This new law allows employees to save for retirement and eliminate student debt. It’s a win-win for employees.

Final Thoughts

The SECURE 2.0 Act offers motivation and opportunities for more people to save for retirement. With an increased age for RMDs, a larger amount for catch-up contributions, higher Roth contribution limits, and the ability to roll over 529 savings into a Roth IRA, saving for retirement are more accessible.The new changes make it easier to save for retirement, allowing more people to enter their golden years with enough money to last their lifetime. The changes are gradual, and not every change will affect everyone, but most people are affected in some way by the new changes.