On December 29, 2022, the SECURE Act 2.0 of 2022 was signed into law to enhance America’s retirement savings outlook. Since the original SECURE Act (Setting Every Community Up for Retirement Enhancement Act) passed in December 2019, legislators have continued exploring ways to address the general inadequacy of Americans’ retirement savings, and the lack of opportunities for lower and middle income workers, people of color, and women to save for retirement.
Studies have shown that people are much more likely to save for retirement if they have access to a payroll deduction savings plan at work – up to 15 times more likely in one study, and 20 times more likely if they are automatically enrolled in the plan.1 But small businesses, which employ almost one-half of U.S. employees,2 often find that time and cost are obstacles to adopting, administering, and funding a retirement plan.
With more than 90 provisions, SECURE Act 2.0 is designed not only to make it easier for employers to adopt and administer retirement plans, but also to help individuals save for retirement and preserve those savings. The changes affect IRAs, small business SEP and SIMPLE IRA plans, 401(k), 403(b), and governmental 457(b) plans, and everyone who uses these tax-advantaged vehicles to save for the future.
1. Expanding employee access to workplace plans.
SECURE Act 2.0 builds on the existing framework to make it easier for employers to adopt retirement plans, especially small employers. For example, beginning in 2023, employers with up to 50 employees can claim a tax credit for 100% of plan start-up costs (up to $5,000) for the first 3 years of plan adoption. A new tax credit is also available to offset a percentage of employer contributions made to the plan for the first 5 years (up to 100 employees). In 2024, a new type of “Starter 401(k)” plan will be available. This plan gives employees the opportunity to defer $6,000 (indexed) of their paychecks into the plan each year but removes the more onerous administrative and funding requirements for employers.
2. Ensuring employees participate in a retirement plan when available.
A new 401(k) or 403(b) plan established after December 29, 2022, will be required to automatically enroll eligible employees into the plan, beginning in 2025. Plans will also be required to automatically increase employees’ savings rates each year. (Employees may opt out. Businesses with up to 10 employees and businesses less than 3 years old are exempt.)
3. Making it easier to save for retirement.
SECURE Act 2.0 creates several plan features that address workers’ financial barriers to saving for retirement, like paying down student loan debt or saving for emergencies instead of retirement. Beginning in 2024, employers can make matching contributions based on a percentage of an employee’s student loan payments for the year rather than the amount the employee is putting into the plan. Employers will also be able to add sidecar savings accounts to their plans, which employees can fund with up to $2,500 and withdraw from tax- and penalty-free. Beginning in 2025, employees nearing retirement age (between ages 60 and 63) will be allowed to save more than the annual contribution limit.
4. Preserving savings for longer.
SECURE Act 2.0 raises the age at which IRA owners and retirement plan participants must begin taking required minimum distributions (RMDs) each year. Beginning in 2023, the starting age for RMDs bumps up from 72 to 73 for anyone who turns 72 after December 31, 2022. (In 2034, the RMD starting age will increase again to 75.) In 2024, designated Roth accounts in employer plans will no longer be subject to the RMD requirement during the account owner’s lifetime, just like Roth IRAs.
5. Giving individuals the choice to pay tax on retirement savings at today’s rates.
Workers can choose to pay income tax on the employer contributions made to their plan accounts each year by electing to treat employer contributions as Roth contributions (if the plan permits). Once contributions are in the Roth account, they’ll never be taxed again, and all investment growth will be tax-free if distributed after age 59½. Similarly, employees participating in an employer’s SEP or SIMPLE IRA plan may choose to treat both employer and employee contributions as Roth contributions.
Start Taking Advantage of Tax Savings Now
With more than 90 provisions, the 5 above barely scratch the surface but can make a big impact on your retirement savings. For a deeper dive into the SECURE Act 2.0, you can read brief explanations of all the provisions in this Summary released by the Senate Finance Committee.
Regardless of where you are in your retirement journey, here are some key points to keep in mind:
- Some of the provisions are effective in 2023, while others have delayed effective dates into 2024, 2025, and beyond. Visit Secure Act 2.0 Passage: Impact on IRAs for a timeline overview.
- If you turn 72 in 2023, you are no longer required to begin taking RMDs this year. You may want to talk to your IRA custodian or retirement plan administrator to make sure you understand how your account will be affected next year.
- Think about what you can do to improve your retirement savings outlook. Your financial advisor can help you determine the right amount for you to save and how investments can help you achieve your retirement income goals.
The information provided in this article is educational content and not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.