Understanding the Impact of Secure Act 2.0 Changes on Savers

Michael Lentz |

The Secure Act 2.0, passed into law by the Biden Administration at the end of 2022, brings forth a series of changes that affect Required Monthly Distributions (RMDs) from retirement accounts, College Savings Plan conversions, and catch-up contribution amounts. These modifications have the potential to significantly influence your retirement strategy. In this blog post, we will delve into the key provisions of the Secure Act 2.0 and discuss how they may impact your financial planning.

Changes to RMD Age:

Under the Secure Act 2.0, immediate changes have been made to the RMD age. The latest age to initiate distributions has been raised to 73. Furthermore, starting from January 1, 2033, there is a provision to increase the RMD age even further to 75. Inherited IRAs from a deceased spouse can also be subject to optional RMD delays. Importantly, the penalty for missed RMDs has been significantly reduced from 50% to 10%, and RMDs are no longer required from Roth 401K accounts.

Updates to IRA Catch-Up Contributions:

The Secure Act 2.0 introduces major changes to catch-up contributions for Individual Retirement Accounts (IRAs), which vary based on the accountholder's age. The regular catch-up provision applies to individuals who have reached age 50, and the $1,000 catch-up limit will now be indexed for inflation. This indexing will take effect from taxable years 2024 and will increase the contribution limit in $100 increments.

Additionally, individuals aged 60, 61, 62, and 63 will have increased contribution limits. These limits will be the greater of $10,000 or 50% more than the regular catch-up amount (currently $6,500). This increase will also be indexed for inflation and will be effective for taxable years beginning in 2025.

College Savings Plan Conversions:

The Secure Act 2.0 grants individuals saving for college expenses in a 529 College Savings Plan the opportunity to transfer the account to a Roth IRA. This conversion will have a lifetime maximum amount of $35,000 for the same beneficiary. Furthermore, the conversion will be penalty and tax-free, starting from the taxable year 2024.

Changes to Employer Accounts:

Employer accounts also undergo several changes with the introduction of Simple-Roth and SEP-Roth accounts. Starting from December 22, 2022, employer 401K match contributions can be made to the Roth portion of employee accounts. However, it's important to note that this change is at the discretion of employers and plan providers. Additionally, employer match contributions can now be used to pay down employee student debt beginning in 2024.

Enhanced Emergency Distribution Options:

401K accounts now offer more options for emergency distributions. A penalty-free distribution of $1,000 can be made, with the option to repay the amount within 3 years. No further distributions can be made within the 3-year period until the initial distribution is repaid. Moreover, employers can enroll employees in an Emergency Savings Account with an auto-contribution of 3% or less. This account has a limited balance of $2,500, with up to four penalty-free annual withdrawals. In case of employment changes, the account can be cashed out or rolled into a retirement account.

Simplified Transfer and Withdrawal Options:

401K plans below a minimum balance can now be transferred more easily. The overall category for penalty-free withdrawals has increased, and provisions for hardship, domestic abuse, and other special cases may eliminate penalties.

Benefits for Small Employers:

Small employers utilizing Multiple Employer Plans or Pooled Employer Plans can benefit from changes