Understanding the SECURE Act and Its Implications for Your Retirement Savings

What is the SECURE Act?

Definition and Purpose of the Secure Act

The Secure Act is a federal measure aimed at encouraging Americans to save for retirement while balancing current expenses.

It is a continuation of the original Secure Act of 2019, also known as the Setting Every Community Up for Retirement Enhancement Act, with new provisions to enhance retirement savings and strengthen the retirement system.

Key Provisions of the SECURE 2.0 Act

Automatic Enrollment and Employer Contributions

Federal lawmakers have said that manual enrollment decreased participation for eligible employees, particularly Black, Latino, and lower-wage workers.

For retirement plans starting after Dec. 31, 2024, employers will automatically enroll employees into a retirement savings plan. The initial contribution must be at least 3% of pretax earnings but not more than 10%. Under the SECURE 2.0 Act, companies have the option to match student loan payments at the same rate as regular elective deferrals and deposit their matching contribution into the employee’s retirement account.

Changes to Retirement Accounts

Required Minimum Distributions (RMDs)

  • The age for required minimum distributions was raised from 72 to 73 in 2023, and will rise to 75 in 2033.

  • The penalty for not taking required distributions decreased to 25% from 50%.

Catch-up Contributions

  • With new provisions in Secure Act 2.0, people 50 and older will have a few more options to catch up to their retirement goals.

  • Starting in 2025, catch-up contribution limits for retirement plans such as 401(k)s will increase from $7,500 per year to $10,000.

  • The limit will be indexed for inflation.

Emergency Savings and Hardship Withdrawals

  • Beginning in 2024, account holders will be able to withdraw from their 401(k) plans or IRAs for emergency expenses without incurring penalties and taxes.

  • Only one distribution of up to $1,000 per year is allowed, and the funds must be repaid within three years.

Education and Loan Debt

  • Parents saving for their children’s college funds will have some new flexibility with their 529 plans.

  • After 15 years, funds from the 529 plan can be rolled into a Roth IRA account for the beneficiary.

  • People with student loans can take advantage of a new incentive under Secure 2.0 Act to balance saving for retirement and repaying student loan payments.

Impact on Retirement Savings

Increased Contribution Limits

  • Catch-up contribution limits for ages 60-63 will increase to the greater of $10,000 or 50% more than the regular limit for 2025.

  • Employers can match an employee’s qualified student loan debt payment with a corresponding contribution to the employee’s retirement plan account.

New Retirement Account Options

Roth 401(k) Plans

  • With Section 604 of Secure 2.0, employees can now choose to have their employer contributions made into a Roth account.

  • The money will count as earned income and incur taxes now, but qualified distributions in retirement will be tax-free.

Qualified Longevity Annuity Contracts (QLACs)

  • The maximum amount that can be used to purchase QLACs is $200,000 (up from $145,000).

  • The “25% of account balance” limitation is eliminated.

Charitable Giving and Retirement

Qualified Charitable Distributions (QCDs)

  • Individuals age 70-1/2 and older can direct up to $100,000 in distributions per year from a traditional IRA to qualified 501(c)(3) charitable organizations.

  • You now have a one-time opportunity to also use a QCD to fund a Charitable Remainder Unit Trust (CRUT), Charitable Remainder Annuity Trust (CRAT) or a Charitable Gift Annuity (CGA).

Planning for Your Retirement

Considering the Effect of the Secure Act

  • The Secure 2.0 Act will change the rules around retirement savings and retirement plan distributions over the next few years.

  • Review the details of your employer-sponsored retirement plan to see if your employer has elected to add any of the optional provisions of the Secure 2.0 Act.

Next Steps

  • Take advantage of increased contribution limits and new retirement account options to boost your retirement savings.

  • Consider consulting a financial advisor to optimize your retirement plan contributions and ensure you’re on track to meet your retirement goals.

 

Categories

Recent Posts