What to know about the SECURE 2.0 Act retirement bill

SECURE 2.0 is a retirement bill that may impact your IRA or 401(k) or other workplace retirement plan. We break down the key changes that may affect you.

What is the SECURE 2.0 Act?

The SECURE 2.0 Act of 2022 is legislation that makes changes to retirement savings account laws. The bill is designed to increase the number of Americans covered by a workplace retirement plan, help Americans save more and keep their savings longer, and simplify retirement plan and account rules. SECURE 2.0 got its name because it builds on the 2019 SECURE Act.

The SECURE 2.0 Act is making the following key changes to retirement savings accounts:

• The age to start taking Required Minimum Distributions (RMDs) will increase, and the penalty for not taking RMDs will decrease.
• The dollar limit for employers to transfer former employees’ retirement from a workplace plan into an IRA will increase.
• New 401(k) plans will be required to have automatic enrollment.
• Employers could offer emergency savings features as part of their retirement plan.
• A retirement savings "lost and found” will be created.
• The direct rollover process will be improved.

How does the SECURE 2.0 Act affect RMDs?

A Required Minimum Distribution (RMD) is a mandatory withdrawal from a retirement plan once you reach a certain age. If you do not take an RMD after a certain age, you will pay a penalty.

Age changes: Starting in 2023, the age you must begin taking RMDs from traditional IRAs and workplace retirement plans (such as 401(k)s) will increase from 72 to 73. In 2033, the RMD threshold age will increase again to 75.

Penalty changes: The penalty for not taking RMDs will decrease from 50% of the RMD amount not taken to 25%. If an IRA accountholder withdraws the RMD previously not taken and submits a corrected tax return within a certain timeframe, the penalty will be reduced to 10%.

Account change: Starting in 2024, RMDs will not need to be taken from Roth accounts in workplace retirement plans while the individual is alive. This harmonizes the rules between Roth IRAs and Roth accounts in workplace retirement plans.

The dollar limit for employers to transfer former employees’ retirement into an IRA will increase

To keep plan costs down, employers can distribute the accounts of former employees in a workplace retirement plan, if the balance is below a threshold. The SECURE 2.0 Act increases the threshold from $5,000 to $7,000. This increase is effective January 1, 2024. Importantly, if the individual does not respond, the balance must be placed into an IRA to keep the savings tax-preferred.

New 401(k) plans will have automatic enrollment

Many 401(k) plans use “automatic enrollment,” which means that a new employee is enrolled in the plan unless the employee opts out. This can be a powerful feature to increase participation in the retirement system.

Under the SECURE 2.0 Act, most employers that start up a 401(k) or 403(b) plan after December 29, 2022, will be required to automatically enroll employees. The automatic contribution rate at enrollment must be between 3% and 10%, with an automatic increase of 1% per year up to at least 10% and no more than 15%. Employees can opt out if they choose. These auto enrollment changes will be effective starting in 2025.

Employers can offer emergency savings accounts as part of their retirement plan

Starting in 2024, employers can offer an emergency savings account within a retirement plan. Highly compensated employees would not be allowed to participate. The cap for this account would be $2,500 and would be indexed for inflation.

A retirement savings lost and found will be created

An online searchable database will be created to help former employees more easily find their retirement savings accounts. Today, many people lose track of their workplace retirement accounts when they leave an employer. This national database will help both employers and employees connect retirement funds to the right people.

The process for direct rollovers will be improved

Rolling over an account from a plan or IRA to another plan or IRA can take a bit of time and effort. To enhance the process, the SECURE 2.0 Act directs the Department of Treasury to develop sample forms for use in these rollovers. The goal is to simplify and standardize the process to make a rollover easier to complete.

Other SECURE 2.0 provisions to note

The act is made up of 92 provisions. Although we can’t cover everything in the retirement bill, here are a few more exciting changes to retirement savings.

Catch-up contribution amounts will increase

Catch-up contributions allow you to make additional contributions to your retirement accounts (401(k), 403(b), governmental plans and IRAs) once you reach a certain age.

Starting in 2025, employers will be able to offer increased catch-up contributions in workplace retirement plans to individuals aged 60-63 years old. The higher catch-up amount will be at the greater of $10,000 or 150% of the regular catch-up contributions limit ($7500 in 2023). That amount will be adjusted annually for inflation.

The IRA plan catch-up contribution limit of $1,000 will also increase with inflation, beginning in 2024.

Employer contributions as Roth

SECURE 2.0 Act allows employers to offer employees the ability to receive matching and other employer contributions on a Roth basis rather than on a pre-tax basis.

Employers can match student loan payments in a retirement plan

Starting in 2024, employers can make a matching contribution to your workplace retirement account based on your student loan payment.

529 plans could rollover to Roth IRAs

A 529 plan is an investment account used to pay for qualified education expenses for a designated beneficiary.

With SECURE 2.0, funds in a 529 plan can be directly rolled over to a Roth IRA for the same designated beneficiary. The direct rollover would not be taxed, but there are some rules to consider.

The account must be in existence at least 15 years, and contributions within the prior 5 years cannot be rolled over. Yearly Roth IRA contribution limits will still apply to the rollover. There will also be a $35,000 lifetime limit on what can be rolled over from the 529 to the Roth IRA for the same beneficiary.

The material in this Blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.