Retirement Savings Update: Your Guide to Secure 2.0

Among the measures included in the omnibus spending bill passed by Congress and enacted in the last week of 2022 is a package of provisions that will fundamentally change the way Americans save for retirement.

Dubbed “Secure 2.0,” the legislation is designed to build upon the retirement system improvements implemented under the SECURE Act of 2019. It makes over 90 changes that help workers save more for retirement, and give employers more flexibility and incentive to offer retirement plans and encourage participation.

Some of the key provisions are detailed below.

Minimum age of required minimum distributions (RMDs) raised to 73
Effective January 1, the age in which individuals must begin taking required minimum distributions (RMDs) from qualified retirement plans increases to 73. In addition, the penalty for failing to take RMDs on time has also been cut in half, from 50% of the undistributed amount to 25%. The law also allows Roth accounts in employer retirement plans to be exempt from RMDs, beginning in 2024. These new rules give retirees more flexibility to either have more time for their money to grow tax-deferred or to take distributions prior to 73 to mitigate tax concerns later on. The law also increases the age for taking RMDs to 75 in 2033.

Catch-up contributions increased
Under the new law, the additional amount over the limit that workers ages 50 and older can contribute to workplace retirement plans increases to $7,500 per year. Those over 60 can add an additional $10,000 over the standard limit beginning 2025. (The law also includes a provision that catch-up contributions for those who make $145,000 or more must be on an after-tax basis.)

Automatic enrollment in workplace retirement plans
Starting in 2025, the new law requires employers with more than 10 employees (who have been in existence for at least three years) adopting new 401(k) and 403(b) plans to automatically enroll eligible employees, with automatic deferrals of at least 3%. Additionally, beginning in 2025, part-time employees will qualify to participate in workplace plans after they’ve worked at least 500 hours a year for two years (existing law requires at least three years).

Change in tax status of employer contributions
Employers can now allow plan participants to designate employer matching contributions as after-tax Roth contributions. Though these contributions would be required to be included as the participant’s income for that year, it could provide some tax flexibility to employees.

Option to offset employees’ student loan debt repayments with matching retirement plan contributions
Some young employees do not contribute to workplace retirement plans because they are paying off student loans. Under the new law, employers can match the amounts of student loan debt repaid by an individual employee with contributions to their retirement plan. This could offer a way for businesses to attract and retain young employees while helping them kickstart the employees’ retirement savings.

New exceptions to early withdrawal penalties
Under current law, those who withdraw from retirement plans before age 59 ½ must pay a 10% penalty. Now, that penalty will be waived for individuals whose physician certifies that they have an illness or condition that is reasonably expected to result in death within 84 months. Effective in 2024, up to $1,000 in withdrawals for certain personal or family emergency expenses will also be allowed penalty free. Also in 2024, hardship withdrawals will be available for those who have been subject to domestic abuse (equal to the lesser of $10,000 or 50% of the vested balance of the retirement account). Effective in 2026, withdrawals of up to $2,500 per year can be made to pay premiums on some types of long-term care contracts.

New terms for 529-plan-to-Roth-IRA rollovers
Starting in 2024, those with leftover money in their college 529 savings plans can roll up to $35,000 of that into a Roth IRA without facing a penalty. This new option has some restrictions: the 529 plan must have been in place for at least 15 years, and the funds must be placed in a Roth IRA with the same beneficiary as the 529 plan. Any 529 contributions made in the previous five years are ineligible. The $35,000 is a lifetime limit, and the amount moved into a Roth IRA in a given year must be within the annual IRA contribution limits.

New options for qualified charitable distributions
Under current law, those 70 ½ and older can direct up to $100,000 in distributions per year from a traditional IRA to qualified 501(c)(3) charitable organizations. The new law offers new options for these qualified charitable distributions (QCDs). Now, individuals can elect to give a one-time gift of up to $50,000 to a charitable remainder unit trust, a charitable remainder annuity trust, or a charitable gift annuity.

That’s just a sampling of the many important changes to retirement savings plans included in Secure 2.0. For a more in-depth look at how the legislation affects you and your business, contact your Weiss tax advisor.