Saving for a more secure retirement just got a little easier, thanks to the recently enacted Consolidated Appropriations Act of 2023, better known as SECURE 2.0.
The new law, which expands on the original SECURE Act of 2019, is loaded with provisions—92 to be exact—designed to improve Americans’ retirement saving options. Here’s a look at some of the changes that could have the biggest impact on your finances, and when those key provisions are set to take effect.
Higher Required Minimum Distribution (RMD) Ages
The original SECURE Act pushed the age when retirees had to begin taking RMDs from 70½ to 72. With SECURE 2.0, the starting age for RMDs increases to 73 in 2023, and 75 in 2033.
If you have a Roth account in an employer-sponsored plan (something that’s becoming more common), you won’t have to take RMDs at all starting in 2024.The new law also reduces the excise tax retirees must pay when they fail to take their RMDs, from 50% to 25%. If the failure to pay is addressed in a timely manner, the penalty will be further reduced, from 25% to 10%.
Larger Retirement Catch-Up Limits
If you’re 50 or older, using catch-up contributions in addition to your regular retirement contributions can help you give your savings an extra boost. Currently the limit on workplace plan catch-up contributions is $7,500 for 2023. But in 2025, the catch-up contribution limit for savers 60 to 63 will increase to whichever amount is greater—$10,000 or 50% more than the current year’s inflation-adjusted catch-up contribution limit.
High-earning employees (those making more than $145,000 a year from one employer) will be required to make their catch-up contributions on an after-tax basis to their employer’s Roth retirement plan.
You won’t see a significant increase in your catch-up contribution limit if you’re the owner of a traditional IRA, by the way. But there is a bit of good news: Starting in 2024, the $1,000 limit will be adjusted for inflation.
New Rules for Unused 529 Funds
If you have unused money stashed in an old 529 college savings plan, you soon may be able to make tax- and penalty-free rollovers from that account into a Roth IRA in the 529 beneficiary’s name.
Several conditions and limitations have been placed on this new opportunity, including:
- The 529 account must have been open for at least 15 years, and contributions made to the plan within the past five years cannot be rolled over.
- Money moved from the 529 will count toward the accountholder’s overall annual IRA contribution limit.
- The lifetime rollover limit is $35,000.
Expanded Automatic 401(k) Enrollment
A major goal behind SECURE 2.0 is to encourage workers to save more for their retirement, and studies show that automatic enrollment significantly increases employee participation in workplace retirement plans.
SECURE 2.0 will require employers to automatically enroll eligible employees in any new 401(k) or 403(b) after Dec. 31, 2024. The initial enrollment amount at that time must be at least 3%, but no more than 10% of an employee’s paychecks.
A participant’s deferral percentage will then automatically increase by 1% a year, until it reaches at least 10%, but no more than 15%.
Existing workplace plans are exempted, and employees can opt out of participating if they choose. There are also exceptions for small businesses with 10 or fewer employees, new businesses, and church and government plans.
Expanded Access to Funds for Emergencies
There are a few exceptions, but typically, if you dip into your retirement funds before turning 59½, you can expect to pay a 10% “early withdrawal” penalty. Starting in 2024, SECURE 2.0 will permit plan participants to access up to $1,000 a year for unexpected emergency expenses without paying the penalty.
The law also will allow non-highly compensated employees to contribute up to $2,500 to an employer-sponsored Roth emergency savings account. Workers will be able to access funds from the emergency account up to four times a year without paying taxes or a penalty on the withdrawal.
Relief for Employees with Student Debt
Employees who choose to opt out of their retirement plan because they’re overwhelmed with student debt often forfeit an important benefit: an employer’s matching contributions.
Starting in 2024, that will change. Employees will be able pay down their old debt while also saving for their future.
Qualifying student loan payments will be treated the same as retirement plan contributions, and employers will be allowed to make matching contributions to a 401(k), 403(b) or SIMPLE IRA retirement account.
Ready to Level Up Your Retirement?
These are just a few of the changes we’ll be seeing as SECURE 2.0 takes effect over the next few years. Schedule time now so we can discuss your specific retirement plan. Your Octavia wealth advisor can assist you in identifying and making the most of any provisions that could affect you, your family, or your business.
Please see Important Disclosures.
