By 2022’s close, SECURE 2.0 had been formally enacted as law. These laws will affect retirement savings for workers of all ages. The second edition of the SECURE Act (Setting Every Community Up for Retirement Enhancement) aims to build on the successes of the first. Find out more about SECURE 2.0’s impact on retirement planning.
Alterations to the minimum distribution requirements
The Internal Revenue Service requires you to remove money from your retirement account annually as part of your required minimum distributions (RMDs). The effects of RMDs are softened by SECURE 2.0 in several ways.
The required minimum distribution age has risen from 67 in 2015 to 73 in 2023, and by 2033 the age will have risen to 75. An additional year of tax deferral is provided (the previous age was 70.5 years old in 2022).
If you missed your RMD deadline in the past, you had to pay a 50% penalty. The penalty for missing an RMD has been reduced to 25% of the RMD amount in SECURE 2.0. Penalties can be lowered to 10% if the mistake is fixed promptly. Furthermore, you may be able to have the penalty for missing an RMD completely removed if you can show that you made a reasonable excuse for your oversight. Moreover, RMDs will no longer be necessary from Roth funds in employer retirement plans beginning in 2024. As a result, many savers who may otherwise miss deadlines owing to simple forgetfulness will benefit greatly from these loosened requirements.
If you’re at least 50 years old, the catch-up contribution regulations allow you to contribute more to your retirement savings accounts than the annual regular contribution limit allows. Catch-up contributions to 401(k), 403(b), government plans, and individual retirement accounts (IRAs) will rise in the year 2025. This allows people to “catch up” on retirement savings whether they started saving later than they should have or didn’t start saving at all.
The catch-up contribution amount for both regular and Roth IRAs had been fixed at $1,000. This initial $1,000 will be increased by the inflation rate each year beginning in 2024. (like the base amount already is).
The catch-up contribution maximum for employees age 50 and older in 401(k) and other employer-sponsored plans was $6,500 in 2022 and $7,500 in 2023. Special catch-up contribution maximums for workers aged 60–63 under SECURE 2.0 are generally greater than $10,000 or 150% of the “regular” catch-up contribution limit for 2024. Beginning in 2026, the initial $10,000 will increase by the rate of inflation.
Changes for the younger workforce
Provisions in SECURE 2.0 may affect how you optimize long-term investments, even if retirement is decades away.
401(k) plan enrollment is automatic
Employers who provide a 401(k) plan will be obliged to automatically enroll their employees in the plan beginning in 2025 unless the employee opts out. Between 3 and 10% of people will be enrolled automatically.
The availability of savings during times of crisis has increased.
One of the best features of SECURE 2.0 is that employees under 59.5 can take out $1,000 from their retirement plan to cover unexpected costs without incurring the usual 10% tax penalty for early withdrawal. A maximum of $2,500 per year might be deducted from an employee’s paycheck and deposited into an emergency savings account set up by the company.
While it’s true that the new law provides investors with more options and a higher level of security, it’s also true that no two people’s retirement strategies are the same. Make sure you talk to a tax or financial expert about how the new SECURE 2.0 rules may affect you.