Understanding the Secure Act 2.0
Secure Act 2.0 is Congress’s latest attempt to nudge us in the direction of saving more now to have more later. While there are many, many things packed into the 19 pages of legislation (like a dense fruitcake), the gist is clear. The government is looking for ways to incentivize retirement saving, remove roadblocks to stashing more as we approach retiring, and remove excuses to wait.
Automatic Enrollment
To boost employees’ savings, Secure Act 2.0 requires automatic enrollment in 401(k) and 403(b) plans starting in 2024. Employees may opt out, but that would require initiative. Congress is banking on employees accepting the status quo. Once signed up, the minimum 3% contribution level savings rates increase automatically until they hit minimum 10% (max 15%).
Student Loans
One of the first roadblocks many people face to retirement savings is student loans. For those burdened with student debt, they can be held back due to the sheer size of monthly payments. This act lets employers see student loan payments as if they were retirement contributions and include them in any matching plan. The employer contribution goes directly into qualified retirement plans on behalf of the employee, starting in 2024.
529 Accounts
On the flipside, many families try to save for college in a 529 account and worry that their child may not need all the college savings. Funds could be trapped unless they take a penalized non-qualified withdrawal which can cause some to hesitate, delay or not participate. The Secure Act 2.0 provides an outlet for up to $35,000 to be rolled over into a Roth IRA for the beneficiary over their lifetime. There are rules around how much (annual limits apply), how long the account must be open (15 years), and when it will start (2024).
Catch-Up Contributions
While we all know the need to begin saving early (and that new 529 rule and 401k student loan match will help), it is often the case that critical mid-career years are when so many of us have competing needs that make it hard to save. So, what to do if retirement savings get pushed off? Catch-up! If you are 50+ you can already contribute more than the standard allowable contributions. Starting in 2024, the IRA catch-up limits for ages 50+ will increase indexed to inflation. For ages 60-63, there is a jump to $10,000 allowable catch-up starting in 2025. Note: catch-up funds will be treated as Roth contributions starting in 2024 (allowable exception if compensation is less than 145k).
Required Minimum Distributions
When it comes time to draw down on retirement funds, Congress is refining rules around required minimum distributions:
Starting in January, the age to begin taking required minimum distributions jumps to 73. As of now, they are planning to raise it to age 75 in 2033.
If you hold tax-preferred annuities in your retirement account, the calculation for your required distribution is changing. You will be able to aggregate (no longer need to bifurcate) your account.
If you make a mistake and do not take adequate minimum distributions, the penalty will reduce from 50% to 25%. It is further reduced to 10% if correct in a timely manner.
In Closing
This act is dense. It’s a lot to digest. There are likely parts of this legislation that may pertain to you that we did not include above. We are happy to dig into the details with you and discuss.
