How the SECURE 2.0 Act Is Transforming Retirement Savings

The year 2023 has brought about significant changes in retirement saving practices, offering relief to individuals planning for their post-work years. After a challenging period of economic downturn and inflation, the markets and U.S. inflation have stabilized, presenting opportunities for savers at various life stages. 

New policies have been introduced to facilitate better retirement preparedness, making it easier for people to save adequately. One notable change in 2023 is the increased contribution limits for 401(k) and IRA accounts, providing more incentives for retirement savings.

The retirement bill known as the SECURE 2.0 Act, signed into law in late 2024, has multiple provisions that have started taking effect this year. These provisions aim to assist individuals in boosting their retirement savings while simplifying and clarifying the rules surrounding retirement plans. John Lau, a managing director, and principal at Robertson Stephens, emphasizes that 2023 is a particularly significant year for retirement planning.

Here are some key highlights of how retirement saving has changed in 2023:

#1 Increased 401(k) Contributions and Catch-Up Limits: 

Regardless of age, individuals can save more for retirement in their workplace plans and individual retirement accounts (IRAs) this year. The catch-up contribution limits, which allow individuals over 50 to save additional funds, increased in 2023. Retirement savers in this age group can now set aside up to $30,000 annually. Individuals need to adjust their contributions accordingly to maximize this benefit.

#2 Automatic 401(k) Enrollment: 

Starting in 2025, employers are required by the SECURE 2.0 Act to enroll eligible employees in 401(k) and 403(b) retirement plans, with the option to opt-out. This provision aims to encourage more individuals to start investing for retirement from the beginning of their employment. Exceptions to this requirement include businesses with fewer than ten employees, new businesses, churches, and governments.

#3 401(k) Emergency Distributions:

While the focus of the SECURE 2.0 Act is primarily on increasing retirement savings, it also introduces expanded provisions for accessing savings during emergencies. From 2024, individuals can withdraw up to $1,000 from their retirement accounts for emergency expenses, with a repayment period of three years. Additionally, victims of domestic abuse can withdraw up to $10,000 penalty-free from their accounts and repay it within three years. People with terminal illnesses can also make penalty-free distributions from their 401(k) plans starting this year.

#4 Roth Employer Match: 

As of 2023, employees now have the option to receive matching contributions from their employers on either a Roth or traditional basis in their 401(k) or 403(b) plans. Contributions to a Roth 401(k) are made after tax, whereas contributions to a traditional 401(k) are made with pre-tax dollars. Employees opting for the Roth option should be aware that the contribution will be taxed in the year it is made.

#5 529 to Roth IRA Conversions: 

In the coming year, beneficiaries will be able to roll-over up to $35,000 from a 529 plan to a Roth IRA. This allows any leftover funds from education expenses to be used for retirement savings, free of tax and penalties. To convert a 529 plan to a Roth IRA, certain rules must be followed. In addition, the beneficiary must own both accounts, and the 529 plan must have existed for at least 15 years.

#6 Matching Contributions for Student Loan Payments:

In 2024, SECURE 2.0 will treat student loan payments as elective deferrals to receive matching contributions. This provision relieves employees who have struggled to balance student loan repayment with retirement savings. It ensures that they no longer have to choose between the two, allowing them to receive matching contributions from their employers while making student loan payments.

#7 Changes to Required Minimum Distributions (RMDs): 

Under the SECURE Act of 2019, the required minimum distribution age was raised to 72, and SECURE 2.0 raised it even higher. Starting in 2023, retirement plan participants must begin taking distributions at 73, and in 2033, the trigger age for RMDs will increase to 75. The tax penalty for failing to take RMDs was also lowered to 25% from 50%.

It is essential to note that the abovementioned changes represent only a portion of the comprehensive provisions introduced by the SECURE 2.0 Act. Reviewing the entire act to identify provisions that directly impact individual circumstances is advisable. For instance, the act allows employers to offer emergency savings accounts, providing an alternative to dipping into long-term retirement savings during unforeseen circumstances.

Overall, the SECURE 2.0 Act aims to encourage retirement savings and address the pressing issue of inadequate preparedness for retirement. It is crucial to save more for retirement and utilize the funds wisely during retirement. Working in alignment with the new laws can contribute to a more secure and prosperous retirement future.