8 Changes from SECURE Act 2.0

On December 29^th, 2022, the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was officially signed into law. The act includes 90+ provisions designed to help savers and people in or near retirement. Here are 8 key changes from the act:

1. Increases the required minimum distribution (RMD) age to 73
Starting in 2023, the age where participants must start distributing money out of their retirement plan will move to age 73, from the previous RMD age of 72. The RMD age is also set to increase to age 75 starting on January 1, 2033.

2. Higher catch-up limits for ages 60-63
In 2023, individuals ages 50 and above can contribute an additional $7,500 on top of the $22,500 standard limit ($30,000 total) to their 401(k) plans. Starting in 2025, the SECURE 2.0 Act will increase the catch-up amount for people ages 60-63 to $10,000 or 50 percent more than the standard catch-up amount. The catch-up will be indexed for inflation after 2025.

3. New plans required to include automatic enrollment
Studies have shown that automatic enrollment significantly increases how many employees participate in their company’s 401(k) plan¹. Starting in 2025, new 401(k) plans will be required to automatically enroll newly eligible participants in the plan, with at least a 3% annual employee contribution but not more than 10%. Each year after the initial enrollment, the contribution amount will increase by 1% until reaching at least 10% but not more than 15%.

4. Student loan payments treated as elective deferrals
Starting in 2024, employers will be permitted to match “qualified student loan payments” with matching contributions toward the employees’ retirement accounts. A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. This is designed to help employees benefit from their employer’s match while paying off student loans.

5. Emergency savings accounts linked to retirement accounts
Starting in 2024, employers will have the option to offer non-highly compensated employees savings accounts that are linked to their retirement accounts. Employees will be able to save up to $2,500 in Roth contributions to the account.

6. Expanding startup credit for small employers
To make it less burdensome on small employers to start a new plan, the act increases the small-business startup credit from 50 percent of administrative costs to 100 percent of costs, with an annual cap of $5,000.

7. Ability to receive matching contributions as Roth
Effective immediately, defined contribution participants can choose to receive their employer match as a Roth contribution. Before this change, matching contributions could only be received on a pre-tax basis. It’s important to note that it may take some time for providers to update their systems before changes can be made.

8. One-time qualified charitable distribution
Starting this year, individuals aged 70 ½ and older are allowed to make a one-time, qualified charitable distribution of up to $50,000 to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.

As you can see, these provisions are designed to help a wide segment of the population. This includes people in or near retirement and individuals that are still years away from their retirement dates.

The eight changes listed above reflect a portion of the act. There are many more, including an update to the saver’s match, changes regarding withdrawals for certain emergency expenses, an update regarding exemption for certain portability transactions, and more. For a deeper review, click here for a more detailed summary from the US Senate Finance Committee.

Sources: US Senate Finance Committee, ¹https://institutional.vanguard.com/iam/pdf/ISGAE_022020.pdf