SECURE 2.0 Provides Positive Changes For Retirement Benefits in 2023 And Beyond

President Biden signed the SECURE 2.0, approved by a nonpartisan Congress in December. The legislation significantly changes the retirement benefits landscape for the better.  

Many provisions will strengthen Americans’ ability to save for retirement by restructuring contribution limits, withdrawal rules, and more. Some retirement benefits will begin on January 1, 2023, or be effective in later years. It has something for almost everyone.

These retirement benefits add to recent improvements for savers and retirees in social security and Medicare, discussed in this related post. After a challenging year with high inflation, rising interest rates, and a bear market, there is something positive to cheer about.

Significant Improvements In Retirement Benefits 

We picked out the many significant provisions of SECURE 2.0, which you can read here.

 Increasing the Age For Required Minimum Distributions

Your required minimum distribution (RMD) is the minimum amount you must begin withdrawing from your account each year or face penalties. Building on the original SECURE Act which increased the age to 72 from 71 to begin making withdrawals, Section 107 raises the age from 72 to 73 years, effective January 1, 2023, and to 75 in 2033. 

A Drop In Penalties

Section 302 will reduce penalties for not making RMD withdrawals on time to 25% of the required amount, down from a steep 50%. The penalty will drop to 10% if the taxpayer corrects the error promptly.

Eliminates Roth 401K Plans

Section 325 eliminates the RMDs for pre-death Roth 401K and 403(b) plans, starting in 2024. Roth IRAs were not subject to RMDs while the owner was alive.  Under current law, however, pre-death distributions were required for the Roth 401K/403(b) holders and caused confusion.  Section 325 is effective for taxable years beginning after December 31, 2023.

Boosting Qualified Longevity Annuity Contracts 

Under the current rules, many retirees don’t need to tap their retirement money except for compliance with RMD rules. You can avoid taking RMDs until later in retirement, as a QLAC’s deferred annuity account value is free of RMDs until you are 85. They provide a way for retirees to hedge the risk of outliving their savings in retirement accounts. It uses tax-deferred savings from a traditional IRA or 401K plan to defer income past 72. 

Section 202 lifts the maximum that can go into the QLAC, allowing up to $200,000, indexed for inflation, from the previous limit of $125,000 or 25% of the value of your retirement accounts, whichever is less.

The new legislation is effective immediately, raises the cap on the QLAC and eliminates the 25% limit, and provides spousal survival rights. This provision is meaningful for fans of deferred annuities. Section 203 allows for variable annuities using ETFs beginning in 2030. 

Employers Expand Automatic Enrollment in 401K and 403(b) Plans

Starting in 2025, in Section 101, employers must automatically enroll participants into 401K or 403(b) plans upon eligibility for their plans. Initially, enrollment will be at a rate of at least 3% but not more than 10%, with a 1% increase annually until it reaches 10%. Employees can opt-out of the plans.

This provision pointed to early studies, including an Ariel/Aon-Hewitt study, which found that plans using automatic enrollment dramatically increase enrollment rates, especially among younger, lower-paid employees and those of color. Businesses with ten or fewer workers are outside this mandate.

 Higher Catch-Up Limit For Savers In Their Early 60s

Employees who have attained age 50 can make catch-up contributions under a retirement plan over the otherwise applicable limits of $6,500 or $3,000 for the SIMPLE plans. Section 109 increases these limits to the greater of $10,000 or 50 percent more than the standard catch-up amount in 2025 for individuals aged 60, 61, 62, and 63. The increased amounts will adjust for inflation.

Higher Contribution Limits For SIMPLE Plans

For SIMPLE plan 401K and IRA holders who work for employers with 100 or fewer employers, Section 117 increases the annual deferral limit and the catch-up contribution at age 50 by 10 percent, as compared to the limit that would otherwise apply in the first year this change is effective, for employers up to 25 employees.

An employer with 26 to 100 employees would be permitted to provide higher deferral limits, but only if the employer offers a 4 percent matching contribution or a 3 percent employer contribution.

 Indexing IRA Catch-Up Contribution Limit Instead of A Flat Amount

Under current law, the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50 and over. The limit for catch-up contributions to an IRA account will be indexed to inflation and may not necessarily be a flat $1,000. Section 108 will be effective in 2024.

Employers Can Contribute Matches For Student Loan Payments

Section 110 is helpful for students saddled with student debt repayments and who need to save for retirement and earn the employer’s match contributions. This provision, effective 2024,  allows an employer who makes matching contributions under a 401(k) plan, 403(b) plan, 457(b), or SIMPLE IRA to those who want the match for qualified student loan payments.

 Enhancing 529 Plans With Rollover To Roth IRAs

Section 126 improves the ability for beneficiaries of 529 college savings accounts to roll over up to $35,000 throughout their lifetime from any 529 accounts in their name to their Roth IRA penalty-  and tax-free.

Families may save too much money for college for their children and incur penalties if they remove leftover money. This provision alleviates that potential. It goes into effect in 2024, is subject to Roth IRA annual contribution limits, and requires 529 accounts to be open for more than 15 years.

Withdrawals For Certain Emergency Costs

Early withdrawal of money from tax-deferred retirement accounts like 401K and traditional IRAs will typically result in a 10% penalty if you are under 59.5 years old. Starting in 2024, Section 115 will improve access to those retirement accounts for emergency costs associated with unforeseeable or immediate financial needs relating to personal or family.

The provision allows one distribution per year of up to $1,000; a taxpayer could optionally repay the amount within three years. The taxpayer can only make further distributions within that timeframe if repayment occurs. After three years, you can withdraw another $1,000.

I am uncomfortable with anyone removing future retirement money for current emergency costs when establishing a healthy emergency fund is a better solution. However, Section 127 (below) allows employers to make it easier for employees to set up emergency accounts, which is a good step. Too few people can easily pay for emergency costs. For those who do not have an emergency savings account, Section 115 benefits people who would feel forced to charge unforeseen costs on their credit card, where the balance proliferates with high-interest rates,  removing retirement savings.

Employers Can Offer Increased Access To Emergency Savings Accounts

Under section 127, companies can let their employees set up pension-linked emergency savings accounts automatically by linking their automatic payroll deductions at no more than 3% of their salary, with a $2,500 cap (or lower as set by the employer). Once reaching the cap, additional contributions can go directly to the employee’s Roth plan. The first four withdrawals per account each year are penalty-free.  This provision is optional for employers and begins in 2024.

Retirement matching contributions will use after-tax Roth rules so that amounts can grow tax-free. Employees may take their emergency savings accounts as cash or roll it into their Roth 401 or  Roth IRA when they leave their company.

 Part-Time Workers Get Better Access To Retirement Accounts

Section 125 improves part-time workers’ access to retirement accounts under the SECURE Act, shortening the years. Part-time workers could become eligible for their companies’ 401K plan if they complete either one year of service (or 1,000 hours) or at least two consecutive years (or at least 500 hours). Section 125 is an improvement from requiring three years of service and is effective in 2025.

Military Spouses Get Access To Retirement Plans Via Tax Credits

Section 112 creates tax credits of up to $500. The maximum credit includes (1) $200 per military spouse and (2) 100 percent of all employer contributions (up to $300) made on behalf of the military spouse. This credit applies to each military spouse for three years. 

Military spouses become eligible for a 401K plan within two months of their hire, qualify for any available matches or contributions upon two years of service, and are 100% immediately vested in all employer contributions.

Final Thoughts

President Biden signed a package of goodies that will significantly improve Americans’ ability to save for retirement by increasing the age for RMDs, increasing catch-up limits for older savers, reducing penalties, and more. The legislation encourages automatic enrollment, access to retirement plans for part-time workers and military spouses, and access to employer’s matches for student borrowers.

It is a big step, but it is up to individuals to leap forward by saving for retirement. Make sure you track your financial benefits significantly when you change jobs. It’s your money for your retirement, and some people have lost track of their retirement benefits.

Related: 10 Valuable Financial Resolutions For 2023

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