During the commotion of the year’s end, Congress passed what is being dubbed “SECURE Act 2.0” on Dec. 29.
This new law adds provisions that allow Americans to save more money for retirement and set up their finances for success. It’s important to know what is in this law and how you can use it to your advantage. Here are some of the key provisions that you will want to be aware of:
Auto Enrollment and Portability
This legislation requires new 401(k) plans, as well as 401(b) plans, to automatically enroll employees in the company plan and start them off at a 3% contribution rate. This means that you will not have to opt in, but rather your retirement savings would start right away once you are eligible for enrollment. This provision will take effect in 2025. In addition, if you have a small balance in your account when you change jobs it will be easier to make it portable and have the existing custodian manage it for you. This potentially requires less paperwork and makes the plans less tempting to cash out.
Student Loan Retirement Match
So many people who have significant student loans aren’t able to save for retirement early on, because of this debt. Before this law was passed, if you chose not to make contributions to your company plan because you couldn’t afford it, you didn’t get a company match because there was nothing to match.
SECURE Act 2.0 allows companies to make a “matching contribution” to your retirement plan commensurate with your payments of your student loans. For example, if your company matches 50 cents on the dollar for contributions to your 401(k), now for every dollar you pay on your student loans your company can put 50 cents into your retirement account as though they were matching your retirement plan contribution.
529 Convertibility
In the past if you didn’t use up all the money in your 529 education savings plan you had to contribute that to another person for them to use or take a penalty for using it for something other than education. If you had one child and they didn’t go to college they wouldn’t get to use the money you set aside.
Now that will no longer be the case. Under the SECURE Act 2.0 up to $35,000 can be rolled over to a Roth IRA (subject to the maximum annual contribution) and is treated as a contribution to the Roth IRA. This allows you to move unused education savings to retirement savings. This is great for everyone.
RMDs
Required Minimum Distributions are amounts that retirees need to take out of their retirement accounts so that the IRS can tax the money that they have waited years, even decades, to tax while it was sitting in your IRA, 401(k) or similar plan. Prior to the SECURE Act of 2020, the age at which you had to start taking withdrawals whether you wanted to or not was 70.5. When the 2020 law took place, it moved the age up to 72; in SECURE Act 2.0 it gradually moves the age up to 75 on a sliding scale as shown here:
Born in 1950 or earlier — RMD begins at age 72
Born between 1951–59 — RMD begins at age 73
Born in 1960 or later — RMD begins at age 75
Also starting in 2024 RMDs will not be required for Roth accounts any longer. This means you can keep Roth funds where they are indefinitely.
Qualified Charitable Distributions
A QCD is a distribution from your IRA to a charity whereby you can meet your RMD requirement, but not pay taxes on the amount donated. For example, if you were to give $100,000 of your RMD to a qualified charity, you would not have to pay taxes on that money. This could save you a significant amount of income tax, because if you were to take the RMD into your own account you would owe income tax on that amount. Assume you are in the 22% tax bracket. This means you save $22,000 by doing a QCD instead of taking the money and then donating it.
Starting in 2023 the $100,000 limit for QCDs will be indexed to inflation, so the amount you can give will go up every year. While this isn’t something everyone worries about, it’s great for those who do.
Increase in Catch-Up Contributions
You may be aware that once you reach age 50 you can add additional funds to your 401(k) or IRA accounts so that you can “catch-up” for lost time by saving more when likely you are earning more.
Starting on Jan. 1, 2025, if you are 60 through 63 you can make a catch-up contribution up to $10,000 to your workplace plan. The current law for 2023 limits contributions into those accounts to $7,500. The one caveat is that if you make more than $145,000 in the year prior, your catch-up contributions will need to be made to a Roth account as opposed to a traditional account. Hopefully this will prompt more companies to offer Roth accounts.
For IRAs, you can currently make a $1,000 catch-up contribution if you are age 50 or over, but in 2024 that will be indexed to inflation, so it will likely go up every year.
Roth Matching
Going forward, employers will be able to make matching contributions to Roth accounts. In prior years you could only get a matching contribution on contributions to a traditional plan. The funds that are matched would be taxable, but future growth would be tax free.
(Disclaimer: Information contained herein does not constitute tax, legal or investment advice. Contact a qualified financial advisor prior to making any financial decisions. The above is a summary of the major provisions of the new law and is not all encompassing of every provision. If you need assistance please reach out.)
