What the Secure Act 2.0 Means for Your Retirement Plans

retirement plan

At the end of 2022, Congress passed a law designed to address America’s growing retirement crisis. That’s right–collectively, as a country our lack of preparation for retirement has reached a level critical enough to prompt government intervention. Consider the following:

In order to encourage people to save more for retirement and make it easier for them to do so, Congress passed the SECURE Act in 2019 and followed with the SECURE 2.0 Act at the end of last year. Here’s what you need to know about the new law.

Changes taking effect in 2023

Changes to RMDs

One provision of the new law that takes effect immediately is raising the age at which individuals are required to take distributions from their retirement plans (known as required minimum distributions or RMDs) to 73. Prior to 2023, the age requirement was 72, so this will allow the delay of most required distributions by a year.

Also, the penalty for failing to take RMDs drops from 50% of the RMD amount to 25%, which can be further reduced to 10% if the issue is corrected in a timely manner.

Taken together, these provisions are designed to allow people more time for their savings to grow in tax-deferred retirement accounts, and avoid excessive penalties if a mistake occurs regarding RMDs. However, keep in mind that if distributions are delayed, the withdrawal amount required in later years will go up, which could have an impact on income tax liability.

Changes to QCDs

Two other changes taking effect this year involve qualified charitable contributions (QCDs) from IRAs. The annual QCD cap of $100,000 is now indexed to inflation, and IRA owners can do a one-time QCD of up to $50,000 through split-interest entities such as a trust, annuity, or donor-advised fund.

Roth Accounts for SIMPLE and SEP plans

Another change taking effect immediately is that small business retirement savings plans (SIMPLE and SEP plans) owners can now make ROTH IRA (after-tax) contributions. Prior to 2023, SIMPLE and SEP IRA plans could only accept pre-tax contributions.

Changes taking effect in 2024

Roth 401(k) RMDs

Starting next year, owners of Roth 401(k) plans will not need to take RMDs. This is already the case for Roth IRA plans, so starting in 2024 the rule will apply to both types of Roth accounts. Again, like other changes, this will allow more people to allow their savings to grow in tax-deferred accounts for longer.

Increases to Employee Contribution for SIMPLE IRAs and 401(k)s

Also in 2024, there are changes to the amount that employees of very small businesses (25 employees or less) can contribute to their SIMPLE retirement plans. For both SIMPLE IRAs and 401(k)s, the maximum annual pay-in amount will increase by 10%.  Businesses with 26 to 100 workers can also give this benefit to their employees with a little extra legwork.

Catch-up Contributions 

The new law contains many changes to catch-up contributions, which apply to people 50 and older who want to contribute more than the usual amount of money to their retirement accounts. In 2024, these contributions will be on an after-tax basis, except for those who earn $145,000 or less.

Education Savings Plan Rollover

Another way the new law will allow people to put more money into their retirement accounts is by letting them roll over up to $35,000 from a 529 education savings plan into a Roth IRA, starting in 2024. There’s a few restrictions, but as long as the restrictions don’t apply to you it is a great way to use leftover 529 plan funds without paying a penalty.

Changes taking effect in 2025

Automatic enrollment in 401(k) plans

One of the biggest changes made by the new law takes effect in 2025, which is that employers with a workplace retirement plan will be required to automatically enroll employees in that plan. Employees will have to opt out to avoid participating in the plan. This could do quite a bit to help the retirement crisis, since currently many employees do not participate in their workplace retirement plans.

Part-time worker eligibility

In addition, part-time employees can now participate in their employer’s retirement plan if they work 500 hours for two consecutive years. Currently, they must do this for three years, so this will make more part-time workers eligible to participate in these plans.

There are many other provisions in the SECURE 2.0 Act, but those outlined above are some of the most important to be aware of.  Figuring out how the changes affect you and your retirement plans can be confusing, so as always, we recommend seeking the help of a reputable CPA to assist you. Consult with a professional this tax season to update your retirement strategy to avoid missing out on any opportunities you have as a result of this new law.