On December 29, 2022, the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 (“SECURE 2.0”) was signed into law.  The new act which builds on the SECURE Act of 2019, has bipartisan support for new reform to address the country’s retirement savings gap, by allowing Americans to save more for retirement.  The law, which adds more than 90 new retirement plan provisions, is intended to expand and increase retirement savings while also simplifying many complex and confusing existing retirement plan rules. Below is a brief summary of a few of the key provisions of the new SECURE 2.0.

Mandatory Automatic Enrollment:

Effective for plan years beginning after December 31, 2024, most new 401(k) and 403(b) plans must automatically enroll employees when eligible. Automatic deferrals must start between 3% and 10% of compensation, increasing by 1% each year, to a maximum of at least 10%, but no more than 15% of compensation.  The burden will shift to the employee should they choose to not enroll and participate in the plan.

Required Minimum Distributions (“RMDs”):

RMDs are withdrawals that the IRS requires seniors to take from most types of retirement accounts.  Beginning January 1, 2023, the starting age will rise from 72 to 73.  The SECURE 2.0 will eventually increase the RMD age to 75 in 2033, for certain individuals. In addition, it reduces or entirely eliminates the excise tax imposed for not taking an RMD, depending on the circumstances surrounding the missed distribution.

Additionally, starting in 2024, Roth accounts in employer-sponsored plans, such as 401(k) plans, will be exempt from the RMD rules while the participant is alive.

Roth Election for Matching Contributions:

Effective immediately, participants may make a Roth election to employer matching contributions.

Increase in Catch-up Limits:

For participants 50 or older, retirement plans allow for catch up contributions, giving them the opportunity for an increased annual participant contribution.  Starting in 2023, the catch-up contribution amount will be $7,500 for most retirement plans and is subject to inflation increases moving forward.

The new provision also provides a second increase in the contribution amount for those aged 60, 61, 62, or 63, effective for tax years after 2024. For most traditional 401(k) plans, this “second” catch-up limitation is $10,000.  Like the “standard” catch-up amounts, these limitations are also subject to inflation adjustments.

Penalty-free Emergency Withdrawals:

Currently there are numerous rules and stipulations that participants must adhere to when seeking a withdraw from their retirement accounts.  Often associated with those distributions are penalties and additional taxes that are imposed on the withdrawn amount.  The SECURE 2.0 will now allow penalty-free distributions for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” up to $1,000.  The withdraw will be taxable, however it will not be subject to the 10% penalty for early withdrawals.  Only one distribution may be made every three years or one per year if the distribution is repaid within three years.

New Universal Database:

SECURE 2.0 creates a national online searchable database to better help employers locate “missing” plan participants, and plan individuals and beneficiaries to locate retirement funds from previous employers.

In short, SECURE 2.0 has made several much-needed adjustments to the country’s retirement system.   The comprehensive legislation allows for increased retirement saving opportunities for working Americans while providing incentives and simplifications to plan management for employers and business owners.

 

Kristie L. Guadiano
Partner

Disclosures:

This is provided for informational purposes only and should not be interpreted in any way as investment, tax, accounting, legal or regulatory advice. An investor must take into consideration his/her individual circumstances. 

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.  All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their wealth advisor prior to making any investment decision.