SECURE 2.0: Enhancements For Retirement Benefits in 2023 And Beyond

President Biden signed SECURE Act 2.0 on December 29, approved by a nonpartisan Congress. The legislative package of goodies significantly changes the retirement benefits landscape for the better.

These enhancements will strengthen Americans' ability to save for retirement by raising the age for taking Required Minimum Distributions (RMDs), higher contribution limits for older savers, and providing automatic enrollment 401(k) plans.

This legislation adds to recent improvements in social security and Medicare. After a challenging year for retirees who grappled with high inflation, rising interest rates, and a bear market, they can cheer these new benefits.

 Enhancements For Retirement Benefits

 Increasing the Age For RMDs

The 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 start making withdrawals, Section 107 raises the age 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 401(k) Plans

Section 325 eliminates the RMDs for pre-death Roth 401(k) and 403(b) plans, starting in 2024. Under current law, the requirement of pre-death distributions for the Roth 401(k) and 403(b) confused people who used Roth IRAs. Roth IRAs were not subject to RMDs while the owner was alive.

Boosting Qualified Longevity Annuity Contracts (QLACs)

A QLAC using tax-deferred savings from a traditional IRA or 401(k) plan now allows you to defer income past 72. It can help retirees avoid RMDs until later, as its deferred annuity account value is free of RMDs. Many retirees don't need to tap their retirement money but do so to comply with RMD rules.

However, the current law provides limits of $125,000 and has a 25% cap on the value of your retirement accounts. Section 202 lifts the maximum to $200,000 that can go into the QLAC, indexed for inflation, and eliminates the cap.

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

Starting in 2025, in Section 101, employers must automatically enroll participants into 401(k) or 403(b) plans upon eligibility for their plans – but employees can opt out. Initially, enrollment will be at a rate of at least 3% but at most 10%, with a 1% increase annually until it reaches 10%.

Studies found that using automatic enrollment dramatically increases enrollment rates, especially among younger, lower-paid employees and those of color.

 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 to 63. The increased amounts will adjust for inflation.

Higher Contribution Limits For SIMPLE Plans

Section 117, effective 2024, increases the annual deferral limit and the catch-up contribution at age 50 by 10 percent, compared to the limit that would otherwise apply in the first year. This change is for employers with up to 25 employees. SIMPLE (Savings Incentive Match Plan for Employees) plans for 401(k) and IRA holders are available with 100 or fewer 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 inflation) for individuals who have attained age 50 and over. The limit for catch-up contributions to an IRA account will be indexed 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 want to save for retirement and earn the employer's match contributions. This provision, effective in 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 plans 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 is effective in 2024, is subject to Roth IRA annual contribution limits, and 529 accounts were open for over 15 years.

Withdrawals For Certain Emergency Costs

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.

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 with high-interest rates.

Employers Can Offer Increased Access To Emergency Savings Accounts

Under section 127, starting in 2024, companies can allow employees to set up emergency savings accounts automatically. Employees can link their automatic payroll deductions at no more than 3% of their salary, with a $2,500 cap.

Once reaching the cap, additional after-tax contributions can go directly to the employee's Roth plan. The first four withdrawals per account each year are penalty-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, effective in 2025, improves part-time workers' access to retirement accounts under the SECURE Act, shortening the years. Part-time workers could become eligible for their companies' 401(k) plan if they complete either one year of service or two years rather than three years.

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 401(k) 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.

Incentives For Americans

The new legislation takes a big step in incenting Americans to save for retirement by providing better access to employer-sponsored plans through automatic enrollment while increasing the age for RMDs, higher catch-up limits for older savers, and reduced penalties will help retirees.

This article was produced by The Cents of Money and syndicated by Wealth of Geeks.

The cents of money is about financial education, here to teach and inspire you about money, seek new ideas, and to create greater comfort in your world about one of life’s great stresses. Linda wants to use her financial skills honed by her professional experience to help others.