Are you concerned about your financial future after retirement? You are not alone. Most Americans feel ill-prepared financially for life after work and steady paychecks. With strict rules about building and accessing retirement funds such as IRAs, the government has finally stepped up to improve the outlook of retirement savings for individuals and employers with the Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act.
Following the framework of the 2019 version, in December 2022 the legislature signed into law the revised SECURE Act 2.0 to further improve the outlook of America’s retirement saving plans.
Studies show that individuals are 20 times more likely to be successful in starting, building, and maintaining a retirement fund if their employers provide an automatic enrolment retirement plan that deducts money monthly.
Provisions in the newest SECURE Act 2.0 aim to make it easier for employers to establish and administer retirement plans by lowering costs but also help individuals save for retirement with incentives to save more and preserve those savings through improved retirement plans.
In this article, we’ll explain how the new changes to the original SECURE Act will impact the future of retirement plans for Americans.
What is the SECURE Act?
In December 2019, the SECURE Act was signed into law by the legislature. This far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged retirement accounts and decreasing the potential for retirees to outlive their savings.
It does so by revising existing rules regarding retirement savings, including eliminating age limits for traditional IRA contributions and raising the age of required minimum distributions (RMDs). The SECURE Act also provided 401(k) plan eligibility for long-term, part-time employees.
Key Revisions in the SECURE Act 2.0
With upwards of 90 provisions to the original Act, SECURE Act 2.0 not only makes it easier for employers to establish and administer retirement plans by lowering costs but also helps individuals save for retirement with incentives to save more and preserve those savings through improved retirement plans.
The SECURE Act version 2.0 requires most employer-sponsored retirement plans to automatically enroll new employees, and make it easier for individuals with student loans to save, in addition to many other measures.
These new changes affect:
- Small business SEP and SIMPLE IRA plans
- Governmental 457(b) plans
Among the most notable changes include a big step toward ‘Rothification’ through new requirements, expanded use, and even a way to move money from a savings account for college to a Roth IRA. It also offers some unique features, including access to an emergency fund in your 401(k).
5 Ways the SECURE Act 2.0 Will Help You Save For Retirement
Both employees and employers can take advantage of the expansion of opportunities and credits created for workplace retirement plans.
1. Providing Easier and Broader Access to Employee Retirement Plans
Building on the existing framework, the SECURE Act 2.0 makes it easier and more affordable for employers to adopt retirement plans.
Beginning in 2023, small businesses with 50 or fewer employees can claim a tax credit (up to $5,000) for 100% of start-up costs for the first 3 years. A new tax credit is also available to offset a percentage of employer plan contributions for the first 5 years for 100 employees or fewer.
In 2024, a new type of “Starter 401(k)” plan will become available, giving employees the opportunity to defer $6,000 of their paychecks into the plan each year.
2. Employee Participation in Eligible Retirement Plans
In 2025, a new 401(k) or 403(b) plan will be required. Employers must automatically enroll eligible employees into the plan and automatically increase employees’ savings rates each year. This will ensure that individuals are getting the support they need to save for their future.
3. Saving for Retirement is Now Easier
This law has many features that address the obstacles and financial challenges that prevent workers from starting or building retirement funds including paying down student loans or saving for college funds instead of retirement.
Here are a few key features starting in 2024 that will make saving for retirement easier!
- Employers will be able to make matching contributions based on an employee’s student loan payments rather than the amount paid into a retirement plan. This will empower individuals to pay off their student loans faster, and then start to save for retirement more aggressively.
- Employers can add sidecar savings accounts to the retirement plans they offer, allowing employees to fund these with up to $2,500 and be able to withdraw the funds at any time free from penalty and tax.
- Beginning in 2025, employees nearing retirement age (between ages 60 and 63) will be allowed to contribute more than the annual savings limit.
4. Protecting Your Savings
SECURE Act 2.0 has increased the age at which retirement plan participants and IRA owners must start taking their required minimum distributions (RMDs) each year.
- In 2023 the starting age for RMDs jumps from 72 to 73.
- In 2024 designated Roth accounts in employer plans will not be subject to the RMD requirement during the account owner’s lifetime, the same as Roth IRAs.
5. Option to Pay Tax on Retirement Savings at Today’s Rates
Employees can choose to pay income tax on the employer contributions made to their plan accounts each year by electing to treat employer contributions as Roth contributions (if the plan permits). Once contributions are in the Roth account, they’ll never be taxed again, and all investment growth will be tax-free if distributed after age 59½. Similarly, employees participating in an employer’s SEP or SIMPLE IRA plan may choose to treat both employer and employee contributions as Roth contributions.
For more information about the SECURE Act 2.0, you will find brief explanations of all the provisions in this Senate Finance Committee Summary.
New Changes to Roth Accounts
For those with Roth accounts, here are the four most significant Roth-related retirement changes following the passing of Secure Act 2.0.
- Rollovers from 529 Plan to Roth IRA
Starting in January 2024, individuals can make penalty-free rollovers from 529 college savings plans to Roth IRAs (with limitations).
- Required Minimum Distributions (RMDs) for Roth 401(k) Plans
Starting in 2024, individuals who leave assets in a Roth employer plan won’t be subject to RMDs during their lifetime. This allows those with Roth accounts who want to stay in the plan, the option to bypass RMDs and keep saving.
- Exceptions for Required Catch-up Contributions for Roth Accounts
Another major change is the requirement that plan participants 50 years and above make catch-up contributions to a Roth account. The new rule provides an exception for workers who earned less than $145,000 the previous year for the same employer. Starting in 2024, changes will apply to 401(k), 401(a), 403(b), and 457(b) plans.
- Employer Contributions for Roth Accounts
Effective immediately, employers may offer non-elective or employer-matching contributions to Roth accounts. All employer Roth funds will be 100% vested, which could potentially cause a cash crunch if employer contributions are large since the employee doesn’t get any extra cash to pay the tax.
Where SECURE Act 2.0 Falls Short
Since the start of the original SECURE Act, the general inadequacies of the American retirement system remain the same. While the new provisions of SECURE Act 2.0 will certainly help many people save more, the bill avoids the heart of the retirement crisis…..roughly half of Americans don’t have any savings for retirement or an emergency fund in place.
And then there are the freelance and gig workers, who are among the more than 40 million Americans who don’t have access to auto-enrollment employer-sponsored plans.
Unfortunately, the Secure Act 2.0 will do little to help workers who slip through the cracks going months or years without saving and who face a very stressful financial future.
Planning for Your Future
At the very least, the SECURE Act 2.0 reveals the importance of revisiting your retirement and tax planning strategy. The newest provisions can make a big impact on your retirement savings and should be highly considered.
Regardless of where you are in your retirement journey, think about what you can do to improve your retirement savings outlook. Your financial advisor can help you determine the right amount for you to save so you can achieve your retirement income goals.