On December 29, 2022, President Biden signed the SECURE 2.0 Act into law. As an intended upgrade to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, the expanded legislation makes important changes that could help strengthen Americans’ financial readiness for retirement.
According to a recent survey, around 55% of Americans say they’re behind on saving for retirement.1 This has caught the attention of Washington policymakers, and the SECURE 2.0 Act changes are designed to help people reach their savings goals and have more flexibility upon retirement.
Check out these 7 important changes of the SECURE 2.0 Act. Note that some of these changes could have an immediate impact on your retirement strategy, while others will begin over the next few years.
1. The SECURE 2.0 Act raises the starting age for RMDs.
Effective January 1, 2023, the age when individuals must begin taking required minimum distributions (RMDs) from traditional IRAs and workplace retirement plans increases from 72 to 732. This higher threshold age allows retirement savers to keep money in their IRAs longer, earning more money.
More changes will come on January 1, 2033. At this time, the threshold age for RMDs will rise again to age 752. In addition, the penalty for failing to take RMDs on a timely basis is cut in half from 50% of the undistributed amount to 25%3.
2. The SECURE 2.0 Act increases catch-up contributions.
Catch-up contributions to retirement savings accounts got a boost from the SECURE 2.0 Act. This gives people who are approaching retirement the ability to pack more into their retirement accounts before they retire. Check out this article to see how catch-up contributions are changing for traditional and Roth IRAs, 401(k) and other employer-sponsored plans, and for SIMPLE Plans.
3. The SECURE 2.0 Act requires auto enrollment in 401(k) plans.
Currently, employers have the option to initiate automatic enrollment of employees into a workplace retirement plan. However, effective in 2025, the SECURE 2.0 Act requires most major employers to initiate automatic enrollment into workplace retirement plans. Employees can choose to opt out, but this change will hopefully encourage people to save more.
4. The SECURE 2.0 Act could help those burdened with student loan debts.
Beginning in 2024, employers will be able to make contributions to workplace savings plans on behalf of employees who are repaying student loans. Employer retirement plan contributions can match the amount of student loan debt repaid by the individual worker in a given year.
5. The SECURE 2.0 Act creates a “Backdoor” Child IRA.
Under prior law, leftover balances in 529 education savings plans can be taken as a non-qualified distribution, with the earnings portion subject to income tax and a 10% penalty. However, beginning in 2024, leftover balances of up to $35,000 in 529 education savings plans can be rolled into a Roth IRA. Check out this article to learn how proactive parents and grandparents can use this new rule to shift wealth from one generation to another.
6. The SECURE 2.0 establishes a Saver’s Match.
Effective in 2027, the current Saver’s Credit program is being replaced by a Saver’s Match, which will equal up to 50% of the first $2,000 contributed by an individual into a retirement account each year (or up to $1,000)4. The federal matching contribution will be deposited into savers’ traditional retirement accounts.
7. The SECURE 2.0 Act expands circumstances where penalty-free withdrawals could occur.
Current tax code imposes a 10% penalty for retirement account distributions taken prior to age 59-1/2, but the SECURE 2.0 Act adds some exceptions to the 10% penalty. For example, effective immediately, the penalty for early withdrawals is waived for those who are certified by a physician to have a terminal illness5; distributions must be repaid within three years to avoid penalty. Other exceptions effective at future dates help victims of domestic abuse6 and people in long-term care contracts7.
We’re here for you!
This is just a snapshot of a few changes included in the SECURE 2.0 Act; there are many more changes that will impact workers and retirees. Updates to the law may require you to revisit your contribution and withdrawal strategies or change your estate planning strategy. If you have questions or concerns, Bankers Life investment professionals are here to help! To get started, contact us today, and a local Financial Representative will reach out to you.
1CNBC, 55% of Americans are behind on saving for retirement—and that’s OK, https://www.cnbc.com/2022/11/04/more-than-half-of-americans-behind-on-retirement-savings.html, 2022.
2United States Senate Committee On Finance, SECURE 2.0 Act of 2022, https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf, 2022, p. 2.
3Ibid., p. 9.
4Ibid., p. 1.
5Ibid., p. 13-14.
6Ibid., p. 11.
7Ibid., p. 15.