How Will Secure Act 2.0 Impact You?

Signed into law by President Biden in December 2022, the Secure Act 2.0 provides sweeping changes that will enhance both working and retired Americans’ abilities to optimize their retirement plans.  The new legislation has a little something for everyone, from working professionals to business owners and retirees.  It builds upon the original Secure Act of 2019, which, at the time, increased the required minimum distribution age from 70.5 to 72.

There are dozens of new provisions that will impact how people will build, and eventually distribute, their retirement savings in employer-sponsored retirement plans and IRAs.  Ultimately, the changes will help empower individuals and their families to reach savings goals and provide more flexibility.

Some changes in the Act are effective immediately, while others will begin in the coming years.  Here are some of the most important changes:

Changes Impacting Working Professionals and Business Owners

• Automatic enrollment in 401k plans
  • Effective in 2025, most major employers will be required to automatically enroll participants into a workplace retirement plan (minimum 3%). Employees who do not wish to participate may opt out. These rules exclude businesses with 10 or fewer employees and companies in business for less than 3 years.
• Matching for Roth 401k
  • Until recently, company matches have been strictly with pre-tax dollars, even if a participant made Roth 401k contributions. Soon, employers will be able to provide participants with post-tax, Roth contribution matches.
• Student loan debt
  • Beginning in 2024, the Secure Act 2.0 will allow employers to match employees’ student loan payments with a contribution to their employer-sponsored retirement accounts.
• 529* flexibility
  • Secure Act 2.0 gives individuals the ability to roll some unused 529 plan assets to a Roth IRA for the beneficiary. The following rules and limitations apply:
    • The 529 account must have been in place for at least 15 years.
    • The beneficiary must be the same on the 529 plan and the Roth IRA.
    • There is a $35,000 lifetime limit per beneficiary, and the amount rolled into a Roth IRA each year must be within annual IRA contribution limits.
    • Any 529 contributions and earnings from the preceding 5 years are not eligible.

Changes Impacting Those Approaching Retirement or Already Retired

• Increase in the age for Required Minimum Distributions (RMDs)
  • As of January 1st, 2023, the age when individuals begin their mandatory distributions from individual and workplace retirement accounts moved from 72 to 73.
    • Those turning 73 in 2023 can choose to take their first distribution by December 31, 2023, or delay taking it until April 1st, 2024. From then on, RMDs must be satisfied by December 31st each year.
  • On January 1st, 2033, the RMD age will increase again, to 75.
  • Additionally, the penalty for failing to take RMDs on time decreased from 50% of the undistributed amount to 25%, effective in 2023.
• Increase in catch-up contributions
  • In 2023, participants of employer-sponsored retirement plans age 50 or older may contribute an additional $7,500 to their plans, an increase from the previous amount of $6,500. In 2025, this amount will increase to $10,000 (indexed for inflation) for participants who are 60-63 at that time.
  • If a participant earns more than $145,000 in the prior calendar year, all catch-up contributions will need to be made to a Roth account with after-tax dollars.
  • IRA catch-up contributions are currently $1,000 per year but beginning in 2024 the limit to catchup contributions will be indexed to inflation.
• Roth 401k and Required Minimum Distributions
  • Until the Secure Act 2.0, those with Roth 401k accounts were still required to take a minimum distribution once they reached RMD age. With the new provisions, the Roth portion of 401ks will no longer be subject to RMDs, aligning to Roth IRA rules.

Overall, the numerous provisions of the Secure Act 2.0 are complex but provide opportunity for Americans to take control of their retirement savings and enhance their retirement plans.  These changes will impact everyone, and it is important to understand how ongoing legislation will affect your financial picture.

The Glassy Mountain Advisors team is here to help you navigate important financial decisions, including how you may be affected by Secure Act 2.0.  Contact Matt Altman (maltman@glassymountainadvisors.com) if you would like to discuss these or other financial planning matters. We welcome the opportunity to help you assess these changes and what they mean to your financial future.

* A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty.

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