“Top 8 Changes in Retirement Savings with SECURE 2.0 Act”

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New Rules for Retirement Savings: SECURE 2.0 Act

The SECURE 2.0 Act, signed into law on December 29, 2022, introduces new rules aimed at encouraging retirement savings and removing barriers that deter people from investing in retirement accounts. This legislation also incentivizes small businesses to offer retirement plans to their employees and promote participation in these plans.

Key Provisions of SECURE 2.0

SECURE 2.0 includes over 50 provisions that impact retirement savings. While some will take years to fully implement, here are eight significant changes that could affect your retirement savings strategy.

1. Rolling Leftover 529 Funds Into a Roth IRA

Starting in 2024, funds left in a 529 education account after covering qualifying education expenses can be rolled into a Roth IRA. This alleviates concerns about over-saving in a 529 plan. Key rules include:

• The Roth IRA will belong to the beneficiary, typically the child.
• The 529 must be open for more than 15 years.
• Rollovers are capped at $35,000 total.
• Rollover contributions are subject to annual Roth IRA contribution limits.
• The beneficiary must have earned income equal to the rollover amount.

2. Making Larger Catch-up Contributions

From 2025, individuals aged 60 to 63 can make additional catch-up contributions to their 401(k), 403(b), or governmental 457(b) retirement plans. In 2023, those aged 50 or older can contribute an extra $7,500 annually. Under the new rules, those aged 60-63 can contribute an additional $10,000 or 50% more than the regular catch-up contribution, whichever is greater. This limit will adjust for inflation.

3. Matching Student Loan Payments

Starting in 2024, employers can match qualified student loan payments with contributions to 401(k), 403(b), 457(b), or SIMPLE IRA plans. The match rate will be the same as for regular retirement contributions.

4. Changes to Employer Retirement Plans

SECURE 2.0 introduces several changes to employer-sponsored retirement plans, including:

• Small-business startup credit: Employers with up to 50 employees can deduct up to 100% of the administrative costs of setting up a small employer pension plan and claim an additional credit of up to $1,000 per qualifying employee.
• Automatic enrollment: Starting in 2025, businesses must automatically enroll employees in 401(k) or 403(b) plans, with initial contributions ranging from 3% to 10% of wages, increasing by 1% annually up to a maximum of 10% to 15%.
• Benefits for part-time employees: Part-time employees will be eligible to participate in their employer’s 401(k) or 403(b) plan after two consecutive years of service.
• Starter 401(k) or safe harbor 403(b) plans: Employers without retirement plans can offer these plans with contribution limits matching IRA limits, starting in 2024.

5. Emergency Savings Linked to Retirement

From 2024, employers can create pension-linked emergency savings accounts for employees, allowing contributions of up to 3% of salaries, with employer matches up to $2,500 per year. The first four withdrawals annually are penalty-free.

6. Penalty-Free Withdrawals in Qualifying Circumstances

SECURE 2.0 introduces new exceptions to the 10% early withdrawal penalty from retirement plans, including:

• Financial emergency: Withdraw up to $1,000 for unforeseen emergencies, with one distribution allowed per year.
• Domestic abuse: Withdraw up to $10,000 or 50% of the retirement account, whichever is less, without penalty.
• Federally declared disasters: Withdraw up to $22,000 without penalty, with the amount included in gross income over three years.
• Terminal illness: Withdrawals without penalty for terminally ill account holders.

7. New Rules for Required Minimum Distributions

The age for required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement accounts increases to 73 in 2023 and 75 in 2033. Starting in 2024, RMDs are eliminated for employer-sponsored Roth plans.

8. Updates to the Saver’s Credit

In 2027, the nonrefundable Saver’s Credit will be replaced by the Saver’s Match, offering 50% of up to $2,000 per person in federal matching funds deposited into retirement accounts. The match phases out at $20,500 for single taxpayers and $41,000 for married couples filing jointly.

9. Retirement Savings Lost and Found

A new national online database, developed by the Department of Labor, will help individuals locate lost retirement benefits from companies that have moved, closed, changed names, or merged.

The Bottom Line

SECURE 2.0 introduces numerous provisions to make saving for retirement easier for individuals and employers. With new rules allowing rollovers of leftover 529 funds into Roth IRAs and penalty-free withdrawals under certain circumstances, people may feel more encouraged to save for retirement, knowing they can access their funds as needed.

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