The retirement planning journey may at times feel like navigating a maze. Did you know Congress has been working to improve the journey? In 2019, the SECURE Act was signed into law and in 2022 SECURE Act 2.0 brought further enhancements to make retirement savings even more accessible.
While there are numerous provisions, here are just a few, along with some FAQs. Whether you're a dedicated employee or captain of the employer ship, there's something in it for you.
Employee Perks
- Access for Emergencies
Employees may take one penalty-free distribution up to $1,000 per year for unforeseeable or immediate financial needs. It is subject to income tax and must be repaid. A new side-car Emergency Savings Account (ESA) was also introduced. Employers may amend their retirement plan to offer the ESA to permit non-highly compensated employees to voluntary enroll. They may contribute up to 3% of their after-tax pay until the ESA reaches the $2,500 cap.
- Enhanced Catch-Up Contributions for Ages 60 - 63
SECURE 2.0 enhanced catch-up contributions so that individuals ages 60 through 63 can now contribute to their retirement account an additional 50% more than the standard catch-up contribution allowed for ages 50+.
- Later Start for Required Minimum Distributions (RMDs)
The age for starting RMDs increased to 73 and jumps to 75 in 2033, thus delaying when distributions from IRAs and employer sponsored retirement plans must begin.
Employer Perks
- Enhanced Tax Credits for Start-up Plans
Small business owners can smile about SECURE Act 2.0’s expanded tax credits for those adopting their first retirement plan. This financial incentive encourages smaller enterprises to provide retirement benefits for their employees, fostering improved financial security for their workforce. - Group Plan Solutions:
Legislation opens the doors for Group Plan Solutions. It can be a welcome solution for smaller plans that participate and experience the benefits of reduced administrative and compliance burdens, while gaining the cost efficiencies normally reserved for large retirement plans. - Introducing a New “Starter 401(k)” Option
Small employers without a retirement plan can avail themselves of a new and economical plan design. It does not permit employer contributions and the plan is exempt from certain compliance testing. Employees must be auto-enrolled, but the option exists to opt-out. Maximum deferral limits are lower than traditional 401(k) plan limits and generally mirror the lower IRA contribution limits. Employees benefit from the convenience and discipline of saving regularly through payroll deduction.
Portability of Lifetime Income Options
SECURE Act 2.0 encourages employers sponsoring a retirement plan to include lifetime income options in their plan design. The new law provides safe harbor liability protection for the employer and introduces measures to enhance the portability of guaranteed lifetime income options, thus allowing employees to seamlessly transfer annuities or other lifetime income products when changing jobs. While this feature is not yet prevalent, the groundwork is being laid for increased adoption.
Frequently Asked Questions:
- When do provisions take effect?
Provisions phase in gradually, with some already starting January 1, 2023 and others rolling out over the following four years. - Does it provide features for individuals struggling with student loan debt?
Yes. SECURE Act 2.0 allows employers the option to make retirement plan matching contributions based on an employee’s qualified student loan payments. - Does this change my 529 college savings plan?
The law allows education savings 529 beneficiaries to rollover up to $35,000 from a 529 account into a Roth IRA, within certain restrictions. - Is it true there are automatic enrollment requirements for new plans?
Yes. Newly established plans will need to automatically enroll their eligible employees to promote saving for retirement. Automatically increasing the employee’ savings rate over time is also required. While employees can opt-out, it is wise to stay in the plan to save for a successful retirement outcome.
SECURE Act 2.0 strives to improve retirement security in the United States. By serving interests of both employees and employers, including small business owners, this legislation shapes a more resilient and inclusive retirement savings landscape. It can be confusing though. If terms or programs leave you with questions, don't hesitate to reach out to your local financial advisor.