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SECURE 2.0 was signed into law at the end of 2022. The second version of this law stands for “Setting Every Community Up for Retirement Enhancement” and is intended to build on improvements to the US pension system. Whether you’re a long way off or fast approaching retirement, here’s how SECURE 2.0 is impacting your retirement planning.
Changes to required minimum distributions
Minimum Required Distributions (RMDs) are the amount of money required by the IRS that you must withdraw from your retirement account each year. SECURE 2.0 reduces the impact of RMDs in several ways.
First, the age to start taking RMDs has been raised to 73 in 2023 and will be raised again to 75 by 2033. This gives savers an extra year of tax deferral (the previous age was 70.5 years in 2022).
Previously, failure to take your RMD before the deadline resulted in a 50% penalty. Under SECURE 2.0, the penalty for not taking an RMD has been reduced to 25% of the RMD amount. If the error is corrected appropriately and in good time, the contractual penalty can be further reduced to 10%. Additionally, if you can show that your failure to take an RMD was the result of an understandable error, you may be able to waive the penalty entirely. And from 2024, no more RMDs will be required from Roth accounts in company pension schemes. These relaxed rules are good news for the many savers who may miss deadlines due to a simple oversight.
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Changes in the amount of catch-up contributions for older employees
If you are at least 50 years old, the catch-up contribution scheme currently allows you to put more money into your retirement savings account than the normal contribution limit for the year. In 2025, these catch-up contributions will increase for 401(k), 403(b), government plans, and IRA account holders. This gives anyone who has delayed pension contributions (or hasn’t started saving yet) a chance to ‘catch up’ before reaching retirement age.
For Traditional and Roth IRAs, the catch-up contribution amount was previously $1,000. Beginning in 2024, the $1,000 amount will be adjusted annually for inflation (as it is already the base amount).
For 401(k) and other employer-sponsored plans, the catch-up contribution limit for employees age 50 and older was $6,500 in 2022 and $7,500 for 2023. Under SECURE 2.0, for the most part, the special catch-up cap for workers 60-63 years old is the greater of $10,000 or 150% of the “standard” catch-up amount for 2024. The $10,000 amount will be adjusted for inflation each year beginning in 2026.
Changes also for younger workers
Even if retirement is decades away, the provisions in SECURE 2.0 can impact how you maximize your long-term savings.
Automatic 401(k) registration
Beginning in 2025, employers who offer a 401(k) plan will be required to automatically enroll their employees in the plan unless the employee opts out. The automatic registration rate is between 3 and 10%.
Better access to emergency savings
One of the highlights of SECURE 2.0 is the ability for employees to withdraw up to $1,000 from their retirement account for emergency expenses without incurring the typical 10% early withdrawal tax penalty if they are under the age of 59½. Companies could also allow workers to set up an emergency savings account with a $2,500 cap through automatic payroll deductions.
A full summary of all provisions included in SECURE 2.0 can be found here. While it’s clear that this law offers savers more flexibility and better protection, every retirement plan is different. Be sure to consult a financial advisor or tax professional to learn how the SECURE 2.0 changes apply to you personally.