Signed into law on Friday, December 23, 2022, SECURE Act 2.0 is a sweeping legislation that includes a variety of small changes that may make saving for retirement easier for many. SECURE Act 2.0 revises the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The bill bolsters auto-enrollment in 401(k)s, raises the retirement plan catch-up contributions limits, and allows employers to help employees pay off student loan debt and set up emergency savings accounts. There are potential benefits for people of all levels of income and all ages.
With the hope of this providing a way to get people to save more, this bill will require employers to auto-enroll their new employees in a retirement plan. Many U.S. employers offer 401(k)s or other retirement plans, but not all employees participate. Automatic enrollment requires employers to set up new employees on the plan at some savings level, and it is up to the employee to opt out of the plan.
There are many exceptions, including all currently existing plans. Starting in 2025, employers that provide newly created 401(k) and 403(b) plans will have to auto-enroll their workers with an initial contribution rate between 3% and 10%.
The new law will allow for more significant savings for employees who are approaching retirement. Under current law, employees 50 and older can add large sums, called "catch-up" contributions, to their retirement plans beyond the usual limits. In 2021, the cap for such contributions was $6,500. Starting in 2025, the new law raised the cap to $10,000 for savers aged 60 to 63.
Required Minimum Distributions
For those with other resources, such as wages from their job or other investment income, this change to Required Minimum Distributions (RMD) could open some tax planning opportunities. Currently, RMDs require savers to withdraw money from their retirement plans at a certain age, beginning at 72. The SECURE Act 2.0 would raise it to 73 in 2023 and 75 in 2033.
One often-used planning tool is Roth conversions done in the years before the RMD age. The increase in RMD age allows this strategy to potentially help reduce tax liabilities for a few more years.
The hope is for employees with student debt to be able to afford not only paying down student debt but also saving for retirement. SECURE Act 2.0 offers an option for employers to help reduce debt. Beginning in 2024, employers will be allowed to make a special kind of matching contribution: Whatever amount the worker is spending on their loans, the employer can match a percentage of that amount for their retirement plan. The law applies to 401(k), 403(b), SIMPLE IRA and 457(b) plans.
Savings for retirement is essential, although having enough savings to cover emergencies increases the odds that the money in the retirement accounts will still be in the account at retirement. Tapping retirement accounts can be expensive since you not only have to pay the taxes on the withdrawal, but you may also owe a penalty. SECURE Act 2.0 attempts to help solve this problem by creating emergency savings accounts.
In addition to retirement plans, employers can auto-enroll their "non-highly compensated employees" in these new accounts, which would absorb up to 3% of their salaries. Once an employee reaches the maximum contribution — which can be set anywhere up to $2,500 — any additional amount would overflow into his or her retirement account.