Good News: SECURE Act 2.0 Can Help You Save More for RetirementBy Jesse Giordano, CFP® | January 12, 2023
The way you approach retirement saving may be changing, thanks to a new spending bill that was recently signed into law. The Securing a Strong Retirement Act (SECURE 2.0) builds on the SECURE Act of 2019. It introduces additional changes that could impact the way you build your nest egg. Here’s a rundown of what you can expect.
Automatic 401(k) Enrollment
SECURE 2.0 will require employers to automatically enroll employees in their 401(k) plan at a minimum of 3%, but no more than 10%, of their paychecks. (Employees can opt out if they choose.) Businesses that have been around for less than three years or have 10 or fewer employees are exempt. The rule could help workers get a jump on their retirement savings. According to a 2021 poll conducted by Principal Financial Group, 84% of workers who were automatically enrolled said it helped them save earlier for retirement.
Higher Required Minimum Distribution (RMD) Ages
RMDs are required for plans like 401(k)s and traditional IRAs. The RMD age was bumped up to 72 a few years back. The new SECURE Act is increasing it to 73 in 2023—and 75 in 2033.
It’s also modifying the 50% penalty currently charged to folks who fail to take their RMDs in time. The new law will reduce it to 25%, though it could be as low as 10% if you withdraw the required amount by the end of the following year. If you have an employer-sponsored Roth retirement plan, RMDs will be eliminated altogether beginning in 2024, similar to Roth IRAs.
Relief for Workers with Student Loan Debt
Some employees who have student loans choose to pay down that debt instead of contributing to an employer-sponsored retirement plan. Starting in 2024, these loan payments will be treated the same as retirement contributions to a 401(k), 403(b) or SIMPLE IRA. Employers can then offer a match and contribute to the employee’s retirement plan. This way, the employee is still making progress toward retirement saving while paying off their student debt.
Larger Retirement Catch-Up Contributions
Catch-up contributions are there to help folks who are 50 and older save more for retirement. 401(k) catch-up contributions are currently capped at $7,500 for 2023 (download the Opal 2023 Qualified Retirement Plan Contribution Guide). That’s on top of regular contribution limits. Beginning in 2025, SECURE 2.0 will increase that amount to $10,000 for those aged 60 to 63. What’s more, catch-up contributions will be indexed for inflation.
Another important note: for those who earn more than $145,000, all catch-up contributions must be made to a Roth account. That means you won’t benefit from pretax contributions.
Support for Workers Building Their Emergency Fund
Saving for the unexpected isn’t always easy. Beginning in 2024, SECURE 2.0 will allow non-highly compensated employees to contribute to an employer-sponsored emergency savings account. It would be a Roth account with a contribution limit of $2,500 or less, depending on the employer. Workers could access these funds up to four times a year with no penalty or tax consequence.
SECURE 2.0 will also allow employees to withdraw up to $1,000 from their retirement accounts to put toward emergencies. They can do this once a year, assuming they make additional contributions afterwards. These emergency withdrawals are penalty-free. (Tapping funds from a 401(k) or traditional IRA before age 59½ usually triggers a 10% penalty.)
Changes to Unused 529 Savings Plans
A 529 savings plan is a tax-efficient way to save for a child’s future college expenses. Beginning in 2024, if you have an account that’s at least 15 years old, SECURE 2.0 will allow you to roll the funds into a Roth IRA for the beneficiary—but there are some conditions. Contributions made within the last five years, along with their earnings, cannot be rolled into the Roth IRA. The rollover amount will also count toward annual IRA contribution limits. An individual can move a maximum of $35,000 from a 529 to a Roth IRA in their lifetime.
SECURE 2.0 is bringing some key changes to retirement planning. As we begin a new year, now is the time to connect with an experienced financial advisor who understands all the nuances. Schedule a call with us today to reevaluate your retirement plan. Whether you are years away from retirement or preparing to leave the workforce soon, Opal Wealth Advisors is here to support you with personalized financial guidance.
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