What is SECURE Act 2.0?
Posted January 30, 2023
Posted January 30, 2023
On December 29, 2022, you may have been enjoying the last few days of your Christmas decorations, putting away new gifts, or preparing for your annual New Year’s Eve party. All in all, December 29th was likely a day just like any other. But you may not have known that while you were taking in the last of the twinkling lights, Congress was putting pen to paper, signing the SECURE Act 2.0 into law.
The SECURE Act 2.0 is intended to help Americans achieve financial and retirement security through a variety of initiatives such as eligibility expansion for small businesses to earn a tax credit, a new credit for employer contribution costs, changes to benefit a multigenerational workplace, student loan payment matching, and more (Source: Paychex).
With all that the SECURE Act 2.0 covers, whether you’re four years away from retirement or forty years away, this new legislation can and will impact your retirement plans.
The Required Minimum Distribution (RMD) changes are some of the most impactful changes included in the SECURE Act 2.0 if you are close to retirement. As of January 1, 2023, the age that a person must start taking RMDs has changed from 72 to 73. It’s important to note that if you turned 72 or older in 2022, you still must continue taking RMDs. However, if you are scheduled to turn 72 this year (2023), you can consider changing your withdrawal plan (Source: Fidelity).
A second change to RMDs is that the penalty for not taking the withdrawal will drop from 50% of the amount not taken to 25% under the SECURE Act 2.0 (Source: Fidelity).
Effective immediately, employers may allow employees to select employer-matching and non-matching contributions as Roth contributions. This is a change as employer contributions to 401(k) plans were typically made as pre-tax contributions. Now, as a Roth contribution, these are made after tax and can grow tax-free over time (Source: EBG Law).
You never know what life will throw at you, so it’s crucial to have a savings plan for when something unexpected happens. Under the SECURE Act 2.0, retirement plans may offer a linked “emergency savings account” to non-highly compensated employees. This change, effective in 2024, will allow employees to make Roth contributions to a savings account within their retirement plans (Source: ADP).
Contributions would be limited to $2500 annually or lower based on the employer. The first four withdrawals made within a year would be penalty and tax-free (Source: Fidelity).
Student loan debt has been a hot topic for several years, and the SECURE Act 2.0 aims to help 45 million Americans whose combined student loan debt is $1.75 trillion (Source: Paychex).
Under the SECURE Act 2.0, employers can “match” employee student loan payments with matching payments to a retirement account (Source: Fidelity). This change will allow employees to pay off student loans while saving for retirement as well.
Catch-up contributions are intended to help those 50 or older make additional contributions to their retirement account. In 2023, the current maximum that can be contributed is $7,500 (Source: EBG Law).
The SECURE Act 2.0’s changes to catch-up contributions are effective for taxable years after December 31, 2024. These changes state that individuals aged 60-63 can make catch-up contributions up to $10,000 or 150% of the regular catch-up contribution for 2024 (Source: EBG Law).
One important caveat is that if you earned more than $145,000 the prior calendar year, all catch-up contributions at age 50 or older would need to be made to a Roth account (Source: Fidelity).
Starting in 2025, the SECURE Act 2.0 requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees starting with a contribution of at least 3% (Source: Fidelity). Furthermore, after each plan year in which the employee has completed a year of service, the contribution percentage must increase by 1% until the contribution is at least 10%, but at most 15% (Source: EBG Law). Employees may opt-out if they choose.
If you are only a few years away from retirement, you may feel unnerved about this new change. How will it affect your retirement plan, and what do you need to know? Or, you may have only been working for a handful of years but are planning. Whichever situation you find yourself in, it’s essential to understand how the SECURE Act 2.0 affects you.
Lucky for you, that’s why we’re here.
In this blog, we talked about six key takeaways you need to know about the SECURE Act 2.0, but we know there’s so much more to it than what we covered here.
If you have more questions about the SECURE Act 2.0 and want to know how it will impact your retirement plan specifically, we are here to help.
The Thayer Financial team has been studying the SECURE Act 2.0 and has developed strategies to help you will benefit from these changes. Give our team a call today or visit our website to schedule your free consultation with our team of experts. We look forward to working with you and being your partner in prosperity.
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