Yes, the SECURE 2.0 Act is a big deal

With over 90 new retirement plan provisions, the passing of the SECURE 2.0 Act means that major changes for both retirees and pre-retirees are on the way. Allworth co-founder Scott Hanson gives you a more detailed look. 

The new SECURE 2.0 Act, which expands on the original SECURE Act legislation passed back in 2019, was recently signed into law by the president.

Make no mistake, whether you’ve just hung up your spurs, you are about to retire, or even if you plan to work for several more years, the SECURE 2.0 Act contains sweeping legislation intended to help you become better financially prepared for the future.

While I will delve into the repercussions of the new law in greater detail as the year progresses, for now, I am going to cover a few key provisions of the SECURE 2.0 Act, including how it can benefit retirees and pre-retirees.

How the SECURE 2.0 Act affects RMDs

For those of you who are approaching retirement, or if you have already retired, but have yet to reach your 72^nd birthday, chief among the changes brought about by the SECURE 2.0 Act are its impact on required minimum distributions (RMDs).

Beginning January 1^st of this year (2023), if you have yet to turn 72 (the age at which you previously had to begin taking RMDs), then you can now wait an extra year (until you turn 73) to take your first RMD. (Additionally, beginning in 2033 – just 10 years from now – RMDs will be delayed until age 75.)

A few things to consider: First, if you will turn 72 this year (2023), and you have already planned to take an RMD, you might want to delay your first RMD until next year.

However, and this is key, for people who have saved well and have other sources of income, and/or large balances in their retirement accounts, waiting to take distributions can be a mistake because, in certain scenarios, the longer you wait the bigger the potential risk that you are going to be bumped into a higher tax bracket. (Make certain you are following a plan that “blends” your income in the most tax friendly way possible.)

Lastly, because you are allowed to wait until April 1^st of the year after you turn 73 to take your first RMD, remember that if you do wait (say, you are turning 73 in 2024, and you wait until April 1^st of 2025 to take your first RMD), you’ll be forced to take two RMDs that year: One for 2024 and one for 2025.

*Everyone’s situation is unique, so speak to your fiduciary advisor to formulate a financial plan that is in your best interests.

Other key SECURE 2.0 Act changes to RMDs include:

• If you turn 73 and, for any reason, neglect to take your RMD, the penalty/fine has been reduced from a full 50% of the required withdrawal amount to 25%.
• Beginning in 2024, if you have a Roth 401(k) sponsored by your employer, you will no longer be required to take RMDs.

How the SECURE 2.0 Act affects catch-up contributions

Although there are income restrictions, as of January 1^st, 2025, folks between the ages of 60 and 63 who are participating in their employer-sponsored retirement plan will be able to make a catch-up contribution of $10,000 per year.

For folks ages 50 and older, the catch-up contribution as of 2023 is $7,500, so this represents a $2,500 increase for the above-mentioned age demographic.

Also, beginning in 2024, IRA catch-up contributions for folks ages 50 and older (currently $1,000) will be indexed for inflation, which could result in a yearly increase.

How the SECURE 2.0 Act affects savers who are not planning to retire for years

First, for employees, there is a provision for automatic retirement plan enrollment, as well as another for easier retirement plan portability (transfer) when you change jobs.

Something I am in favor of is the automatic enrollment of eligible employees into company-sponsored 401(k) and 403(b) retirement plans. And, beginning in 2025, with a starting contribution rate of 3% of pre-taxed income, the SECURE 2.0 Act legislates just that. (And, of course, you can opt out.)

The new legislation also makes it easier for those folks who, say, over lengthy careers, have accumulated small islands containing 401(k) balances in the wake of their work history. The new law allows them to bring those balances into their current plan when they change jobs. This encourages people to keep the money in a retirement plan rather than, as so many people do, cash out each time they move on to a new place of employment.

Other key SECURE 2.0 Act provisions for pre-retirees include:

• Help saving for emergencies: With an annual max contribution limit of $2,500, beginning in 2024, the SECURE 2.0 Act contains a provision that allows retirement plans to include a special Roth account that doubles as a penalty-free emergency savings fund.
• Help paying off student loans: Also beginning in 2024, as an inducement to save for retirement, the Act includes an option for employers to contribute extra to an employee’s retirement account in an amount that is equal to that employee’s student loan payments.

As I mentioned in the introduction, the SECURE 2.0 Act contains 90 new retirement account provisions, so its long-term effects, though potentially positive, require a deep understanding of how the decisions you make today will impact your financial situation in the future.

Please speak with your fiduciary advisor and your accountant to learn how this far-reaching legislation can benefit you.