Secure act 2.0

There’s a lot of talk about the Secure Act 2.0 and how it will affect retirement planning. But what does it mean for you? Here’s a quick overview of the key changes and what they could mean for your retirement strategy.

What is the Secure Act 2.0?

The Secure Act 2.0, which was recently passed by the House of Representatives and signed into law by the President, is an update to the original Secure Act from 2019. It provides updates to retirement savings in the U.S. and implements higher levels of annuity flexibility for qualified employer plans, removing the lifetime cap for defined contribution plans, and raising the age requirements for taking RMDs from 70 ½ to 72. Additionally, it requires employers to provide “long-term” part-time worker access to 401(k)-style retirement plans and expands ways people can withdraw from retirement accounts without penalties. The Secure Act 2.0 also makes tax credits available to employers that provide student loan contributions and retirement plan payout options on a press release basis or when an employee dies or becomes disabled.

Here is a summary of a few key changes1:

  • The age to start taking RMDs increases to age 73 in 2023 and to 75 in 2033.
    • If you’re turning 72 in 2023, you can take your RMDs by December 31, 2024, or April 1, 2025. The latter date would require you to take two RMDs in 2025.
  • The penalty for failing to take an RMD will decrease to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs.
  • Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.
  • Catch-up contributions will increase in 2025 for 401(k), 403(b), governmental plans, and IRA account holders.
  • Defined contribution retirement plans will be able to add an emergency savings account associated with a Roth account.
  • People who are 70 ½ or older may elect as part of their Qualified Charitable Distribution limit, a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity.
  • Starting in 2025 businesses adopting new 401(k) and 403(b) plans will be required automatically enroll eligible employees, starting at a contribution rate of at least 3%.
  • After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit.

2.0 Updates

One of the biggest changes brought on by the Act is that it allows people to use their retirement accounts to pay for long-term care expenses without any kind of penalty or tax consequence. Previously, if you withdrew money from your IRA to cover private duty nursing, you would be responsible for paying a 10% early withdraw penalty.1 This change is significant because long-term care can be expensive, with some sources estimating costs of up to $100,000 a year.2 Rather than having to liquidate other assets or take out loans for these costs, people may now explore using their retirement accounts.

Other changes include making it easier for small businesses to offer retirement plans and allow part-time workers to participate in employer-sponsored retirement plans. The retirement plans at many small businesses may be difficult for employees to access, so recent changes have been making it easier for these workplaces to offer these plans. As part of this goal, employers are now able to offer retirement opportunities to part-time workers, giving these individuals the chance to start building a retirement fund.

Good News?

The Secure Act 2.0 may be good news for people who have saved less than they need to retire comfortably. Under the new rules, individual retirement accounts are no longer limited by age and contributions are allowed until the end of life. This way, those in their 70s and beyond can still save funds to secure their retirement and better protect themselves against outliving their savings. Moreover, withdrawals from these accounts can now serve as long-term care expenses without facing a tax penalty. As a result, individuals with adult children or elderly parents can now ensure that their family members receive the best possible financial support. ­

If you have any questions about how the Secure Act 2.0 affects you, and what you could do to take advantage of the new rules, reach out to a Journey Strategic Wealth advisor.