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How Secure Act 2.0 Changes Retirement

How Secure Act 2.0 Changes Retirement

| July 21, 2023

In December 2022, congress enacted the Secure Act 2.0 to address America’s growing retirement crisis. Secure Act 2.0 introduces reforms that will make it easier for Americans to save for retirement. Here are some of the most important ways Secure Act 2.0 will change your retirement planning strategy.

Automatic 401(k) Enrollment

Starting in 2025, employers will be required to enroll workers in a 401(k). The contribution rate must be at least 3% of the employee’s salary, with a 1% annual increase until the rate achieves a minimum of 10%. 

Exemptions are made for certain small businesses, government plans, and church plans. Employees can actively opt out of a 401(k) but otherwise will be enrolled automatically.

Changes to Catch-Up Contributions

Once you turn 50, you’re eligible to save more money in your individual retirement account (IRA) and/or 401(k). Secure Act 2.0 expands these catch-up contributions as follows:

IRA Catch-Up Contributions

As of now, IRAs restrict you to $6,500 per year, though Americans who are age 50 or older can save an additional $1,000. But Secure Act 2.0 will allow for cost-of-living adjustments, which means you’ll be able to deposit more on a per-year basis.

401(k) Contribution Limits

Americans can currently contribute $22,500 to 401(k) or 403(b) plans and an additional $7,500/year once they turn 50. 

Secure Act 2.0 will add another category for workers between the ages of 60 and 63. Beginning in 2025, these workers can contribute either (1) $10,000 or (2) 150% of the standard limit, whichever is greater. Both of these numbers will adjust with inflation.

Required Minimum Distributions (RMDs)

Starting at age 72, U.S. law forces you to receive required minimum distributions (RMDs) from your pre-tax retirement accounts, and you must pay income tax on these distributions. Secure Act 2.0 changes the age requirement. It gets a little confusing, but the breakdown is as follows:

  • If you turn 72 after 2022 but turn 73 before 2030, RMDs start at age 73
  • If you turn 73 after 2030 but turn 74 before 2033, RMDs start at age 74
  • If you turn 74 after 2034, RMDs start at age 75

Secure Act 2.0 also ends all RMDs for Roth accounts.

529 to Roth IRA Conversions

A 529 account is designed to save for your children’s education. It grows tax-free, though contributions are tax-deductible only within certain states. And if you withdraw the money for anything other than education, you’ll face a 10% penalty.

With Secure Act 2.0, you can convert as much as $35,000 from a 529 plan to a Roth IRA without penalty. This conversion is subject to the usual contribution limits, which means you can convert only $6,500 per year. Additionally, the 529 plan must be at least 15 years old before converting.

401(k) Emergency Distributions and Emergency Funds

You’re permitted to withdraw money from your 401(k) or other pre-tax retirement accounts, though you’ll incur a penalty of 10% on any distributions you receive. But Secure Act 2.0 allows you to withdraw as much as $1,000 penalty-free, with an option to repay your account within three years. 

This change provides a default emergency savings plan that Americans can tap into.

Secure Act 2.0 also allows employers to set up and automatically enroll workers in an emergency savings account. This account will be linked to their retirement accounts, with automatic contributions of no more than 3%. 

The total balance on this account is limited to $2,500, but the first four withdrawals are free.

Employer Match for Student Loan Payments

Younger Americans get behind in retirement because they’re focused on paying student loans. But Secure Act 2.0 would allow employers to match an employee’s student loan payments and contribute to their retirement account. 

For example, if your employer provides a 50% matching 401(k) contribution but you’re paying $500 per month in student loans, your employer can still put $250 per month into your 401(k) plan.

Automatic 401(k) Transfers

Under Secure Act 2.0, you can automatically transfer any previous retirement account with a balance of $5,000 or less. This is great news for those who change jobs and need to keep their retirement savings in one place.

Getting Advice for the Road Ahead

Understanding these changes can help you plan your retirement with greater confidence. Consider setting up a long-term financial strategy with the help of Good Life Financial Advisors of Morehead City, NC. 

When you’re ready to plan for your future, contact us to schedule a no-obligation discovery meeting. This will give you the chance to decide whether we are a good fit to help you pursue your goals.