What You Need To Know About The Secure 2.0 Act
February 22, 2023
The Secure Act 2.0 has been signed into law and this new implementation would affect how Americans can save up for retirement. Over the next few years, you can expect a handful of changes, but this now allows you to better plan for your future especially if you plan on retiring in the next few years.
What Is Secure 2.0?
The Secure 2.0 Act of 2022 is a new legislation that expands coverage and simplifies retirement benefits. Secure 2.0 will go into effect now through 2026, which means that if you are planning on retiring soon, you’ll want to be aware of the most prominent changes. Secure 2.0 builds on its predecessor — the Secure Act established in 2019 — that further enhances contribution limits and required minimum distributions (RMDs).
Secure 2.0 – Most Notable changes
The Secure 2.0 Act is over 4,000 pages long and includes more than 100 changes. While each is as significant as the last, these are the essential key points that are most likely to affect you:
The biggest change that Secure 2.0 brings is an increase in the age of RMDs. Previously, the government required retirees to take RMDs once they reached 72 years of age — which was recently increased from 70.5 under Secure 1.0. Now, under Secure 2.0, you can push back RMDs until 73 years of age. If you were born after 1960, the act pushes your RMD even longer to age 75.
One of the biggest advantages of the RMD change is that waiting until you turn 75 years old to take distributions may equate to you having more time to tax plan, which then reduces your taxable liability during retirement.
Another big change under Secure 2.0 is that employer-sponsored Roth accounts are no longer subject to RMDs. Previously, if you had a Roth 401(k) through an employer, you were subject to RMD rules. This is no longer the case. The government has also expanded your options when it comes to investing in a Roth. If you are self-employed, for example, you may benefit from Roth Simple or Roth Step accounts, which can offer some tax advantages.
Secure Act 2.0 doesn’t only affect those nearing retirement. Even while you are still an employee of a company who is many years away from retirement, the Secure 2.0 Act now allows you to receive matching contributions from your employer into a Roth 401k, previously you could only receive these funds as pre-tax 401k contributions. This gives younger investors more tax-planning options.
Secure 2.0 Act also allows you and your family to roll over any 529 plans into a Roth IRA. This is a great option for children who may change their minds about college or who find alternative ways to fund their post-secondary education, and have money left over after graduation. However, there are rules to this conversion, including maximum contributions of $6,500 per year or $35,000 over a lifetime. A few other caveats, the 529 plan has to have been established for 15 years and you cannot convert any funds deposited into the 529 plan within the past five years
This adds another layer of consideration when weighing the advantages and disadvantages of a 529 plan and how they may help or hinder your children’s or grandchildren’s life goals.
Beginning January 1, 2025, the Secure 2.0 act increases the amount that certain investors can contribute to catching up. If you’re between 60 to 63 years old, you can contribute up to $10,000 in additional funds to a workplace plan unless you earn more than $145,000.
Investors who earn over $145,000 per year can no longer play catchup in traditional pre-tax retirement plans. Instead, you must make your catchup contributions into a Roth account. This means that employees with employers who don’t offer Roth retirement funding options may not be able to make catchup contributions. In addition, this could also have higher earners find alternative ways to reduce their taxable income.
Surviving Spouse Beneficiaries
Secure 2.0 brings changes to surviving spouse rules that benefit families when the younger spouse passes first. If your younger spouse passes before you do, you have the option to transition your RMDs into a longer period of time with smaller distributions. The program replaces your age with the deceased’s age, allowing you to pull money for longer.
Secure Act 2.0 also increases the pool of disabled individuals who can benefit ABLE accounts. An ABLE account works similarly to a 529 plan that allows you to invest, earn tax-free returns, and then withdraw the money for qualified disability costs. While there have always been ABLE accounts, the Secure Act 2.0 allows those who were disabled before age 46 to be eligible to contribute funds to an ABLE account.
Other Changes to Retirement Law To Know
While these are the most important provisions of Secure 2.0 to know, a few general changes to retirement law may also affect you, including:
- An increase on contribution limits for 2023: current maximum contributions are set at $22,500 per year
- Catchup contributions have also increased: If you’re over 50 years, you can contribute an extra $7,500 per year. However, all catchup contributions must now go to a Roth, which no longer reduces your taxable income
Note that while many individuals could be worried about back-door Roth contributions, there are no changes that were implemented regarding this.
When does Secure 2.0 Go Into Effect?
The Secure Act 2.0 will roll out at different times, depending on the specific provision. The most prominent and immediate change to know is RMDs, as these laws have already gone into effect. The rest of the provisions are expected to take place by 2026.
What the changes under Secure 2.0 mean for you depends on your and your family’s financial situation and goals. If you have questions about how Secure 2.0 will impact your retirement plans, feel free to reach out to us. Our wealth managers can help you determine how these changes affect your current retirement plan, what options may be available, and how to best achieve your financial goals with these new laws.