A Refresher on the SECURE Act 2.0 and a Recent Update to It Carmichael Hill

The SECURE Act 2.0 was a major change in legislation passed in 2022 that drastically affected many areas of retirement planning.[1] It changed rules for many aspects of financial planning concerning retirement, but some of the most important changes were that it:

  1. Pushed back the age of RMDs[1]
  2. Changed some rules for catch-up contributions[1]
  3. Changed some rules about access to retirement funds before you retire[1]
  4. Enacted some rules for automatic retirement enrollment[1]

As the SECURE Act 2.0 was put into place and examined, there were some problems implementing some of its provisions due to the way the law was worded.[2] Some key changes were made fairly recently to ensure that essential provisions would work as intended.[2]

The SECURE Act 2.0 Drafting Error

One issue with the SECURE Act 2.0 was that, because of a drafting error in the proposed changes, catch-up contributions to workplace retirement plans after 2024 would not be possible in some situations.[2] Under the provision, any employee over age 50 with Social Security eligible wages greater than $150,000 would only be able to make catch-up contributions to a Roth account. The obvious crux here is that not all workplace retirement plans offer Roth accounts. So, if there is nowhere for the money to go, it would appear that no contribution can be made! The IRS has punted and pushed back the implementation of this Roth rule to 2026.[3] This is a delay only – Congress must still act between now and then to fix this error.

Other changes to catch-up contributions remain. Beginning in 2025, those aged 60-63 will be able to contribute up to $10,000 as a catch-up contribution (max is $7,500 catch-up for everyone else).

Changes to Required Minimum Distributions (RMDs)

Beyond this, Congress also made sweeping changes to Required Minimum Distributions (RMDs). The new age for RMDs is 73, which is up from the previous 72. This increases to age 75 starting in 2033. Penalties for missing an RMD will also drop from the current 50% of the amount that should have been taken out but wasn’t to 25% this year. (This isn’t an open invitation to play with fire now that the penalty has been lessened – take your money out as required).

New Access to Retirement Accounts

Distributions from retirement accounts are generally subject to a 10% penalty when they take place prior to age 59.5. The SECURE Act 2.0 added a provision starting in 2024 that allows account holders to withdraw no more than $1,000/year for personal or family emergency expenses without penalty. Victims of natural disasters can also now withdraw up to $22,000 from a retirement account without penalty. Further, these natural disaster withdrawals can be spread out and taxed (not penalized) over three years.

Automatic Enrollment for Workplace Retirement Plans

One of the biggest impediments to getting people to save is getting them enrolled in a 401(k) or 403(b) program in the first place. Beginning in 2025, these plans will be required to automatically enroll employees at a contribution rate of 3%. Employees must take additional action to disenroll and specifically opt-out.

Retirement plan providers, such as Vanguard and Fidelity and many others, will also be able to offer automatic portability services. This allows former employers the ability to automatically port low balance accounts (less than $5,000) to individual retirement accounts. This provision is expected to help drive down administration costs on 401(k) and 403(b) plans while also keeping smaller balance accounts invested, as the most common option for a low balance account upon separation from service is currently a full liquidation.

SECURE Act 2.0 has many provisions, some of which are just starting to come into play. If you’re curious about how these changes will affect you and what you should do to respond, then give us a call. We don’t charge for an introductory call and can help you plot out a plan to make the most of these changes!

 

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