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What does the Secure Act 2.0 mean for retirement savings?

SECURE ACT 2.0: 7 Important Provisions Affecting Your Retirement

The Secure Act 2.0 is part of the latest spending bill to be passed by the U.S. Congress with a focus on retirement savings and security. This new piece of legislation is designed to help Americans save and prepare for retirement, while offering additional protections and benefits to those who are already retired or nearing retirement age.

There are a number of provisions included in the Secure Act 2.0 that make it easier for employers to offer 401(k) plans and other retirement savings plans, as well as increase access to those plans for employees who may not have had access before. The bill also includes changes that make it easier for retirees to withdraw money from their accounts without incurring significant penalties, as well as provisions that offer tax credits for small businesses that set up retirement plans for their employees.

With many changes included in the bill, it can be difficult to understand exactly what implications this will have for individuals and businesses alike. In this article, we’ll take a closer look at several provisions of Secure 2.0 and how it may affect your retirement savings. 

$1.7 Trillion Spending Bill: 2023 Omnibus Budget Bill

The 2023 Omnibus Budget Bill is an important piece of legislation that will have a significant impact on the US economy. It includes spending for both domestic and international programs and sets budget parameters for the next four years.

The bill also contains provisions to reduce the national debt, increase funding for infrastructure projects, and extend programs like the Supplemental Nutrition Assistance Program (SNAP). Additionally, it allocates funds to several agencies such as the Department of Health and Human Services, the Department of Education, and the Environmental Protection Agency.

The Secure Act 2.0 is just part of the spending bill. Here are some of the other provisions passed by Congress and signed into law by President Biden:

  • $47.5 billion to the NIH, some of which is for research on cancer, opioids, and Alzheimer’s disease
  • $9.2 billion to the CDC
  • $7.5 billion for mental health
  • $3.3 billion for maternal health
  • $45 billion for Ukrainian aid
  • $773 billion towards domestic programs
  • $858 billion in defense spending
  • Continuation of the relaxed Telehealth rules through Dec. 31, 2024
  • Banning Tik Tok on government devises

These are just part of the budget and non-budget add-ons that were part of the 2023 Omnibus Budget Bill. But the part that we will look at here is the provisions of the Secure 2.0.

What is the SECURE 2.0 Act of 2022?

Near the end of 2019, Congress passed the original Secure Act. It changes a number of things, such as raising the Required Minimum Distribution (RMD) age to 72 years old. The original Act effectively did away with “Stretch IRAs” by requiring distributions within 10 years, with certain exceptions.

The new legislation makes modifications to the the original version of Secure, some are big changes and some are minor. Let’s take a look at five of the important changes.

Raising the Age for RMDs

RMD requirements under the first Secure Act raised the age from 70 1/2 to 72. Now the beginning age for taking RMDs is 73 starting on January 1, 2023. It increases to age 75 in 2033. This affects traditional IRAs and traditional and Roth 401(k)/403(b)s.

However, for those who reach 72 years prior to December 31, 2022, they will still be required to start taking required distributions as scheduled. But any person turning 72 after that date will gain an extra year before needing to do so.

Decreased Penalty for Failing to Take Required Distributions

Beginning in 2023, the penalty for failing to take the required minimum distribution will decrease from 50% of the RMD amount that was not taken, to 25%. The penalty is reduced even further, to 10%, for individual retirement account owners who withdraw the RMD not previously taken and who timely file a corrected income tax return.

Increased Catch-Up Amount

To help older workers, the limit on catch-up contributions their retirement accounts would increase starting in 2025, for those who are 60 through 63 years of age. They will be able to contribute an additional amount which is the greater of 50% more than the current regular amount that can be added or $10,000. After 2025, the allowed additional contributions will be indexed for inflation.

Currently, for plan participants over age 50 the additional contribution limit is $7,500 for a 401(k) or 403(b). And for IRAs, the catch-up limit is $1,000, but will be indexed to inflation beginning in 2024.

Emergency Savings Accounts

Plan sponsors will have the option to automatically enroll employees into retirement saving accounts that are linked to their existing retirement plans. Beginning in 2023, those earning less than $150,000 will qualify for these new accounts and can put up to $2,500 into them.

These savings accounts work like a Roth IRA in that after-tax money is contributed. Any distributions are tax free.

Retirement Plan Automatic Enrollment

It has been shown that when you automatically enroll new employees into retirement plans, the rate of savings goes up. So, starting in 2025, the new law requires retirement plans to automatically enroll eligible employees into the plan. There are certain exceptions for small businesses. And employees may opt out if they so choose.

Student Loan Payments

For employees who are straddled with student loan debt, making required loan payments often makes it difficult to also contribute a workplace retirement plan. Secure 2.0 provides that if a worker makes payments on their student loans, employer matching contributions can be made to the worker’s plan even if the worker does not make contributions.

This is a nice benefit allowing workers with high student loan debt to begin to continue paying off their debt, while still being able to save for retirement through employer contributions.

529 Plans to a Roth IRA

Additional changes include the ability to roll unused 529 Plan funds to a Roth IRA. The 529 Plan must be open for at least 15 years. Rollover amounts to the Roth are limited to annual contribution limits and the total lifetime amount that can be rolled over is $35,000.

So, now you don’t have to worry so much about over funding the 529 Plan, at least to an extent.

Conclusion

This new legislation could be very helpful to employees and employers, enhancing the rules around retirement planning. This article only touches on a few of the modifications to the original Secure Act.

Since everyone’s financial situation is different, you will want to talk to a financial advisor or accountant to see how the new Secure Act 2.0 would affect you.

And to understand how your retirement plan coordinates with your living trust, you will want to talk to your estate planning attorney.