Let’s face it: the United States is in the midst of a retirement crisis. According to the National Council on Aging, most older Americans don’t have the financial resources they need to deal with a loss of income due to situations like health problems, widowhood, or divorce.
Furthermore, 80 percent of households containing older adults are financially struggling or at risk of future economic insecurity.
In response to these challenges, the SECURE Act 2.0 act was signed into law near the end of 2022 to make it easier for Americans to get ready for retirement. However, while it has the potential to positively impact your financial situation in your golden years, it may require you to rethink your retirement strategy today.
Retirement can be scary, and understanding your options under the new law is key for securing a stable financial future. Here are the details of the SECURE Act 2.0 and the changes that should be on your radar.
SECURE Act 2.0: Understand the Basics
As its name suggests, the SECURE Act 2.0 is the successor to the SECURE (Setting Every Community Up for Retirement Enhancement) Act. That law—which increased the required minimum distribution age, removed an age limit on IRA contributions, and allowed new parents to take withdrawals without penalties—passed in early 2020.
Like its predecessor, the SECURE Act 2.0 is designed to create new opportunities for people to save for retirement. It introduces dozens of additional tweaks to required minimum distributions, qualified charitable distributions, student debt matching contributions, and much more. And while the SECURE Act 2.0 went live last year, some of its provisions will not go into effect until 2024 or later.
How the SECURE Act 2.0 Affects Retirees
If you just retired or are retiring soon, there are several important things you need to know about the updated legislation that may impact your financial situation.
New RMD Requirements
Since Jan. 1, 2023, people with retirement accounts have had to start taking required minimum distributions (RMDs) at the age of 73—one year later than before. In 2033, the RMD starting age will be pushed back again to 75. Additionally, this legislation has:
- Reduced the penalty for not taking a mandatory RMD from 50 percent of the RMD amount not taken to 25 percent. Account owners can benefit from a further reduction to 10 percent if they withdraw the RMD amount they previously failed to take and adjust their tax return.
- Exempted Roth accounts included in employer retirement plans from RMD (starting in 2024).
- Allowed people to apply in-plan annuity payments over their RMD amount to the year’s RMD, effective immediately.
Catch-Up Contribution Changes
Starting in 2025, people between the ages of 60 and 63 will have a chance to make up to $10,000/year in catch-up contributions to their workplace plan, indexed to inflation. Currently, the catch-up amount for people aged 50 or older is $7,500.
Another change to catch-up contributions will go into effect in 2024. Starting next year, people aged at least 50 who earned more than $145,000 during the year before will need to make catch-up contributions to a Roth account in after-tax dollars. This requirement will not apply to people who earn $145,000 or less in 2024 dollars, to be adjusted for inflation in the future.
Finally, the IRA catch-up contribution limit for people aged 50 or older, currently set at $1,000, will also be indexed to inflation starting in 2024.
Roth Account Matching
Under the SECURE Act 2.0, employers can give their employees the option to get vested matching contributions to their Roth accounts. Matches to employer-sponsored plans were formerly made on a pre-tax basis, but Roth contributions are made after tax, allowing the resulting earnings to grow tax-free.
Expanded QCD Rules
Starting this year, anyone who is at least 70½ years old can opt to make a one-time gift of up to $50,000 (adjusted for inflation annually) as part of their qualified charitable distribution (QCD) limit to a:
- Charitable remainder unitrust
- Charitable gift annuity
- Charitable remainder annuity trust
It should also be noted that this gift amount will count toward the giver’s annual RMD.
Additional Annuity Adjustments
Along with the aforementioned changes, the dollar limit on premiums for qualified longevity annuity contracts went up from $145,000 to $200,000 at the start of 2023. A previous requirement limiting premiums to 25 percent of a person’s retirement account balance has also been eliminated under the new law.
What to Know if You’re Retiring Later
It might be tempting to ignore the SECURE Act 2.0 if you won’t be ready to retire in the near future, but doing so would almost certainly be a misstep. After all, this law introduces a wide variety of changes intended to make it easier for (relatively) young people to save for retirement. Since it’s never too early to begin planning for retirement, you’ll want to read up on:
Automatic Retirement Plan Enrollment/Portability
Under the SECURE Act 2.0, all companies adopting new 401(k) and 403(b) plans must automatically sign up any employees eligible for these plans at a contribution rate no lower than 3 percent from 2025 on. Along with that, providers of retirement plan services are now permitted to offer automatic portability services to plan sponsors—that is, the ability to transfer a worker’s low-balance retirement accounts to new plans when they switch from one job to another.
Emergency Savings Changes
Beginning in 2024, designated Roth accounts for emergency savings can be added to defined contribution retirement plans. These accounts need to belong to non-highly-compensated employees and be capable of accepting participant contributions. Contributions to these accounts will be capped at $2,500 per year, and the first four annual withdrawals will be free of taxes and penalties.
Student Debt Matching
From 2024 on, companies will have the ability to match their workers’ student loan payments with payments to a retirement account. That way, employees can pay off their student debt while having another reason to save for their futures.
529 Plan Rollovers
Once a period of 15 years elapses, people with 529 plan assets will be able to roll these assets over to a Roth IRA in the beneficiary’s name. They will be subjected to yearly contribution limits, as well as a $35,000 aggregate lifetime limit. Rollovers are not allowed to go over the aggregate before the five-year period that ends on the distribution date, and are included as a contribution towards the Roth IRA’s annual limit.
SECURE Your Future With Help From Janney
Planning for retirement can be challenging, especially in the face of sweeping legislative changes. Understanding the technical aspects of the SECURE Act 2.0 is a great place to start, but creating the right plan is a much more complicated challenge.
The good news is that building a retirement strategy isn’t something you’ll have to do by yourself. At the Laurel Highlands Wealth Advisory Group at Janney, our financial advisors specialize in helping people plan for retirement, no matter where they are in their lives. For help creating a retirement plan that takes the SECURE Act 2.0 into account while still meeting your unique needs, schedule an appointment with our team today!
