Four Ways the SECURE Act 2.0 May Affect Your Retirement Plan
April 17, 2023
New rules enable you to enroll automatically, save more, maintain tax-deferred growth longer and tap your retirement funds for emergency expenses
The Secure Act 2.0 takes effect this year, significantly changing the way people invest and save for retirement. Its provisions may affect how you enroll in a 401(k) plan, how much you can contribute to your plan as you near retirement, and when you will need to withdraw funds after retirement.
Here are some of the most important changes to consider when managing retirement savings with the SECURE Act 2.0 in mind.
1: More Time Before You Take Required Minimum Distributions
Federal law requires retirees to begin withdrawing a percentage of their retirement assets every year once they reach a certain age. Required Minimum Distributions, or RMDs, are calculated based on the amount you have in your account and your life expectancy. Your investment provider will typically tell you how much you need to withdraw.
Up until last year, the law required investors to begin making RMDs at age 72. The Secure Act 2.0 raises that age from 72 to 73 starting in 2023. In 2033, the age for RMDs will increase again to 75.
This means investors can keep assets in their plans longer, continuing to benefit from tax-deferred growth. However, it may also mean when you do begin taking RMDs, they could be larger than they would otherwise have been under the old rules. This is because the assets will have grown over a longer time period whereas your life expectancy will be a bit less. Because retirement plan withdrawals are taxable, this change may have an impact on your overall tax liability.
2: Automatic Enrollment in Company 401(k) Plans
Beginning in 2025, if you’re eligible for a company retirement plan like a 401(k) or 403(b), your employer will automatically enroll you and allocate 3% of your salary to retirement savings. If you don’t want to be in the plan or don’t want to contribute 3%, you’ll have to opt-out.
The new law should increase retirement plan participation, especially among lower income workers who have historically not taken advantage of these employee benefits. A quarter of working adults today have no retirement savings, and just under 40% say their retirement savings is on track, according to the Federal Reserve reports. The picture is even bleaker among black and Hispanic employees; over a third have no retirement savings, and only about a quarter say they are likely to meet their retirement goals.¹
However, workers who are already living paycheck-to-paycheck may have a hard time contributing 3% of their salary while still covering ordinary living expenses. The new rule could also create complications for workers who switch jobs or have multiple employers. These employees will have to keep track of retirement plan contributions at all of their jobs to make sure they don’t exceed maximum contribution limits.
3: Larger Catch-Up Contributions for Older Individuals
Employees over 50 have long had the opportunity to make extra catch-up contributions to tax-deferred retirement plans including 401(k), 403(b), 457(b) plans, and Roth and Traditional IRAs. But starting in 2025 these limits will increase substantially. The new maximum catch-up contributions are as follows:
|Under 50||50 to 60||60 to 63|
|401(k) plan||$22,500/year||$22,500 plus catch-up contribution of $7,500||$22,500 plus catch-up contribution of $10,000*|
|Simple IRA||$15,500||$15,500 plus catch-up contribution of $3,500||$15,500 plus catch-up contribution of $5,000*|
*Starting in 2025
In one final tweak to retirement plan rules, catch-up contributions for high-earning employees (with income over $145,000 in 2024 will be treated as Roth contributions. You will not be able to deduct your contributions in the year you make them, but there will be no tax on withdrawals when you start taking money out of your account in retirement, provided the first contribution was over 5 years ago.
If you started late on retirement savings or your account has been affected by recent market downturns, the new higher contribution limits will allow you to build or rebuild your retirement savings faster. However, bear in mind you will eventually have to withdraw assets from your tax-deferred plans as taxable income. Larger withdrawals may have an impact on your overall tax situation in retirement.
4: More Flexible Early Withdrawal Provisions
Tax rules encourage workers to keep retirement money for retirement. There’s a 10% penalty on withdrawals before age 59 1/2. However, the Secure Act 2.0 will make it easier to tap retirement plan assets for unexpected expenses in a number of ways.
- Participants can withdraw up to $1,000 for emergency expenses without penalty as long as they repay the money within three years.
- Employers can offer new emergency savings accounts to employees.
- Penalties are waived for withdrawals made by domestic abuse survivors, those facing a terminal illness, or individuals in need of long-term care.
- In the event of a natural disaster, participants can withdraw up to $22,000 penalty free as long as they repay the money within three years.
These provisions should make it easier for participants to manage unanticipated expenses. But, as always, withdrawing money today means you’ll have less when you retire. Before you tap retirement funds for current needs, consider how it will affect your future financial security.
Other Changes That May Affect You
Although we’ve discussed the Secure Act 2.0’s most important areas of impact on retirement planning, the bill also contains a number of additional provisions that may affect you including:
- 529 to Roth IRA conversion: If you don’t use 529 assets for education, you can now convert them to a Roth IRA for the beneficiary.
- Student loans: Companies can now set up an employer match for student loans.
- Employer match for Roth contributions: Companies can now match employee contributions to Roth 401(k)s.
Talk to your financial advisor about how the new rules could benefit you.
Make the Most of Secure Act 2.0
The new rules brought about by the Secure Act 2.0 should significantly increase your ability to plan for a secure retirement, but it’s important to understand all the implications. If you have questions about your retirement savings, withdrawal strategies, or tax situation, reach out to Trinity Wealth Management.
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- “Economic Well-Being of U.S. Households in 2021” The Federal Reserve, May 2022.