Congress has given retirement savers a nice holiday gift: The SECURE Act 2.0. Tucked into the $1.7 trillion omnibus budget passed on December 23, SECURE 2.0 (Setting Every Community Up for Retirement Enhancement) creates new opportunities for retirement savers of all ages, building on the changes already introduced in the 2019 SECURE Act. It is designed to shore up America’s fragmented and faltering retirement system, making it more suitable for a time when we are living longer and few of us have guaranteed pensions. It is now headed to the President’s desk for certain signature. Of its many provisions, here are some of greatest relevance to our clients.
Required Minimum Distribution Age Raised
The SECURE Act of 2019 raised the age for taking required minimum distributions to 72. SECURE 2.0 raises the age to 73, for people who turn 72 in the year 2023 or later. Increases in the RMD age will be phased in until it reaches 75 in the year 2033. If you can afford to wait to make withdrawals, these changes will allow your retirement money to grow tax-free for longer.
Reduced Penalties For Missing Required Minimum Distributions
Currently, if you fail to take an RMD at the required time you face a hefty penalty: 50% of the amount you were supposed to withdraw. Under SECURE 2.0, the penalty is reduced to 25%. If you correct your mistake after missing the RMD, the penalty is reduced even further, to 10%.
Bigger Catch-up Contributions For 401(k)s and 403(b)s
Effective January 1, 2025, you can make a catch-up contribution to your 401(k) or 403(b) of up to $10,000, indexed to inflation, provided you are between the ages of 60 and 63. If you make more than $145,000 in the prior calendar year, you will be required to “Rothify” your catch-up contribution – in other words, pay tax on that amount the very same year you make the contribution. The catch-up cap in 2023 for people ages 50 and older is $7,500.
Also, effective 2024, catch-up contributions for IRA’s will be indexed to inflation. The current catch-up contribution is $1,000 for anyone age 50 and older.
Searchable Database for Lost 401(k)s
Within two years, the Department of Labor must establish a national online database allowing retirement savers to locate 401(k)s they may have lost track of and left behind when leaving employers.
Employers Required To Enroll Employees in Workplace Plans
Beginning in 2025, employers who are launching 401(k) or 403(b) plans must automatically enroll new workers in the plan (although employees may opt out). Employer contributions must start at a minimum of 3% of employee pay, and increase annually to a maximum of 10%. This provision will not affect you if (1) you are an employee with an existing workplace plan, or (2) are an employer who has been in business for less than 3 years and employs 10 or fewer workers.
Expanded Opportunity for Annuities
SECURE 2.0 gives retirement savers greater opportunity to include annuities in their retirement plan. Up to $200,000 of a person’s retirement savings may now be used to purchase a Qualified Longevity Annuity Contract, a deferred annuity that begins paying out at a later age. (The current law limits you to $135,000, or 25% of the value of your retirement accounts, whichever is less.)
Roth 401(k) RMD’s Eliminated
Until now, if you had a Roth 401(k), you were required to take minimum distributions during your lifetime. The only way to circumvent this was to convert your Roth 401(k) to a Roth IRA, since the latter does not require minimum withdrawals. Under SECURE 2.0, minimum withdrawals will no longer be required for Roth 401(k)s. The rule change goes into effect in 2025 and will benefit those who want to pass their Roth 40lk to a spouse or other heirs, or to charity. (Non-spouses must still deplete the inherited account within 10 years.)
The above is a sampling of key provisions of the new legislation. There are many more. Below are links to articles with additional details.
Since the legislation was passed just four days ago and is still awaiting the president’s signature, expect more detailed analysis and information to become available online in the coming weeks and months.
Get Advice From A Financial Professional
You may wish to seek advice from a financial professional to discuss how these changes impact your plans to save for retirement. If you do not already have a financial advisor, call our office at (561) 625-1100 and we will be happy to refer you to professionals we know and trust.