The Setting Every Community Up for Retirement Enhancement, or SECURE Act, of 2019 was arguably one of the most significant pieces of passed legislation with regards to Americans and their retirement savings. But even the massive piece of legislation had some issues left to resolve, involving both the Senate and the House as they began working on various pieces of additional retirement legislation.
And now, after months of deliberation and debate, the SECURE Act 2.0 is officially the law of the land.
Just like the original groundbreaking SECURE Act, there are plenty of points and benefits in its sequel. For investors and advisors, the rules are complex, but they offer some real wins for retirement.
Be sure to check the Retirement Channel to learn more about investing strategies to build up your nest egg.
A Landmark Bill
The original SECURE Act included plenty of provisions for required minimum distributions (RMD), college savings, part-time workers and life-time income options in qualified savings plans. But even with the law, retirement savings shortfalls have continued to grow, prompting the government to once again act, improve SECURE 1.0 and build on the legislation.
Back in March, 2022, the House of Representatives created the Securing a Strong Retirement Act of 2022 (SSRA), which passed near-unanimously. The Senate began work on the Enhancing American Retirement Now Act (EARN) and the Senate Health, Education, Labor and Pensions Committee’s bill dubbed the Rise & Shine Act. The combination of all these pieces formed the basis for the SECURE Act 2.0.
Congress shoved the legislation into the Omnibus spending bill to keep the government open at the end of last year. And in December of 2022, President Biden signed the broader spending package into law, making the SECURE Act 2.0 a reality. The updated bill features even more widespread solutions for retirement savers and investors.
RMDs Get Pushed Back
The beauty of tax deferral is that you can avoid Uncle Sam’s grasp for potentially decades. However, the government will only allow you to defer taxes for so long. After a certain point, investors are required to take money out of their 401(k) plans as so-called required minimum distributions (RMD) and pay taxes on those amounts. Failure to do so or paying tax on the wrong amount has historically been met with big penalties and fees. With longevity being an issue, RMDs have been a problem for many savers.
Starting this year, the SECURE Act 2.0 pushes the age limits of RMDs back even further. The starting age at which investors must take a RMD is now 73, up from 72. On January 1, 2033, the threshold age for RMDs is set to rise to 75. The SECURE Act 2.0 also removes the requirement that Roth 401(k)s and IRAs be subjected to RMDs and adds in provisions that allow for in-plan annuities, which were allowed under the original act, to have their payouts count towards RMDs.
The SECURE Act 2.0 also reduces some of the fees and penalties for taking RMDs late. Truth be told, the math and dates behind RMDs can be difficult to figure out and many investors get snared by penalties. With the law, the RMD penalty is reduced to 25% of the undistributed amount, down from 50%.
Bigger Catch-Up Contributions
The bill also throws older workers a bone with regards to catch-up contributions to workplace retirement plans and IRAs. These extra contributions allow workers the ability to save more to boost their retirement accounts. Right now, any one above the age of 50 can put an extra $7,500 into their 401(k) plans. Starting in 2025, those individuals aged 60 to 63 will be able to contribute $10,000 annually. This amount is indexed to inflation, and could still rise.
Additionally, IRAs have an annual catch-up contribution limit of $1,000 for workers aged 50 or older. Starting in 2024, that amount will be indexed to inflation.
529 Plans as a Retirement Savings Account
Perhaps the biggest news in the bill is the ability of 529 plan holders to roll over some of their savings into a Roth IRA. One of the issues with 529s has long been that they are designed specifically for college. There can be fees and taxes associated with using the plans for anything but education. This fear has prevented some people from utilizing the accounts or funding them fully.
Starting next year, 529 plans that have been opened for at least 15 years can now be rolled over to Roth IRA accounts for the beneficiary. In total, $35,000 can be moved and counted towards the annual Roth contribution limits.
Where it gets sticky and requires some clarity from the IRS is whether or not parents can change the beneficiary to themselves and conduct the rollover as well as when the 15-year shot clock starts with regards to the beneficiary. But as written, 529 plans could become another backdoor Roth IRA tool for super savers.
Other Provisions
Finally, the SECURE Act 2.0 added several provisions designed to help lower income workers save for retirement, including
- Ability of employers to match 401(k) contributions to Roth accounts
- An automatic enrollment in 401(k)s at a 3% rate
- Creation of a special emergency savings account that allows workers to save up to $2,500 per year, with the first four withdrawals in a year free from any tax or penalty.
The Bottom Line
With these provisions, as well as a few others not discussed here, the SECURE Act 2.0 has quickly changed the retirement landscape just like its predecessor. Ultimately, the bill’s rules are wide sweeping and feature benefits for investors. As the rules roll out, investors should be able to work them into their planning and profit.
Don’t forget to explore our recently launched model portfolios here.
