What the SECURE Act 2.0 means for you and your retirement

“Exciting new developments” isn’t a phrase you often hear in the world of retirement plans, but there’s good news coming for savers of all ages and stages, thanks to an expansion of the SECURE Act passed by Congress in December 2022.

Back in 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act made several changes to retirement rules to benefit savers. This new iteration—dubbed SECURE 2.0—has dozens of additional provisions and updates. Here are some highlights.

As with anything relating to retirement, the devil is in the details, so be sure to check with your employer (or a professional) about the exact terms of different plans, or rule changes, and how they apply to you.

Auto-enrollment in company retirement plans

Call it “no saver left behind”: Perhaps the biggest headliner of the 4,000-page, soon-to-be law is that it calls for companies to automatically enroll eligible employees into new tax-deferred 401(k) or 403(b) plans. 

Auto-enroll features are common in many workplaces, but this provision aims to make sure that more employees have access to a company’s plan—and that at least 3% of each employee’s salary is contributed to their account (but not more than 10%). After January 1, 2025, the contribution amount increases by 1% each year until it reaches at least 10% (but not more than 15%). That’s a steady rate that can really add up over time.

Employees have the choice to opt out. But the beauty of auto-enrollment is that it does an end run around people’s reluctance to sign up for retirement plans on their own. These programs tend to significantly increase savings rates.

Some employers are exempt from this new policy, including companies that are less than three years old; companies with existing plans; those with 10 or fewer employees; and churches.

This rule takes effect in 2025.

Improved 401(k) coverage for part-time workers

Under the original SECURE Act, long-term, part-time workers were allowed to participate in company 401(k) plans once they worked three consecutive years (with at least 500 hours of service per year). Beginning in 2025, such workers are allowed to join the 401(k) plan after only two years of service.  

This rule takes effect in 2025.

Higher contribution limits for older savers

In good news for older savers, SECURE 2.0 has made changes to the “catch-up provision” for both your 401(k) and Individual Retirement Account (IRA), depending on your age.

Right now, if you’re 50 or older, the 2023 catch-up provision allows you to save an extra $7,500 in your 401(k). That’s on top of the 2023 standard contribution limit of $22,500. 

Starting January 1, 2025, if you’re between 60 and 63, the new rules will allow you to save up to $10,000 in 401(k) catch-up contributions. After 2025, catch-up contributions to a workplace plan for that age group will be indexed for inflation.

For IRA account holders over 50, the current $1,000 catch-up amount will also be indexed for inflation starting in 2024, which should provide a bit of a bump to those accounts. (IRAs have much lower contribution limits compared with employer plans.)

A caveat for higher earners. If your individual income is over $145,000, there’s an additional rule that applies to catch-up contributions in a workplace plan. All those catch-up contributions will be directed to a Roth account, meaning the catch-up portion of your savings would not be tax deferred, but rather taxed up front, and tax free when the funds are withdrawn in retirement. If your income is less than $145,000, this wrinkle doesn’t affect you. This rule is effective beginning in 2024.

These limits take effect in 2024 for IRAs, and in 2025 for 401(k) accounts; the high earner rule takes effect in 2024.

Extra 529 funds can add to students’ retirement 

As many parents know, you face a penalty (and sometimes taxes) if you withdraw funds from a 529 college savings plan that are not used for qualified educational expenses. But what if there are funds left over in the account after you’ve paid for your child’s education?

Starting in 2024, unused 529 funds can be rolled over into a Roth IRA for the beneficiary (i.e., the student)—assuming the 529 account is at least 15 years old.

Also, Roth IRA limits apply. You have to stagger the amounts you withdraw from the 529 so you don’t exceed Roth contribution limits in a given year—and you can’t roll over more than $35,000 total over the lifetime of the account. Make sure you work with the holder of the student’s Roth IRA to follow all the rules.

This rule takes effect in 2024. 

Employers can help offset an employee’s student debt

Here’s some relief for those unable to save for retirement because they’re struggling to pay back student debt. 

Beginning in 2024, student debt payments will be counted as if they were retirement contributions and thus eligible for employer-matched funds. That means if you are paying a certain amount each month toward student loans, your employer may deposit a matching amount in a workplace retirement account on your behalf.

This rule takes effect in 2024. 

Higher age for required minimum distributions (RMDs)

For years, a thorn in the side of many retirement savers was the requirement to withdraw a certain amount every year from a tax-deferred account like a 401(k) or traditional IRA. 

In 2019, the SECURE Act bumped up the age at which these required minimum distributions, or RMDs, must start—from 70 1/2 to 72. SECURE 2.0 will increase the age to 73 starting in 2023, with a provision to bump it up to 75 by the year 2033.

This is a boon to many savers who would rather not draw down their nest egg, preferring to give it a little more time to grow.

• Note that if you turned 72 in 2022, the old rule still applies; you must take your first RMD no later than April 1, 2023. (Remember that for your first withdrawal only, you’re allowed to delay until April 1 of the following year.)
• Under the new rule, if you turn 72 in 2023, you can stick to your scheduled RMD, or you have the option of waiting until you turn 73 the following year. That gives you an extra year or more before you need to take a withdrawal (you’d have until April 1, 2025).
• Just remember that if you delay your first withdrawal until the April 1 deadline of the following year, you would have to take two withdrawals in that calendar year: the one in April, which applies to the prior year, and the normal RMD by December 31.
• Another new rule: If you fail to take a required withdrawal by December 31, the penalty has now been dropped to 25% of the distribution amount (from 50%).

This rule takes effect in 2023.

RMDs and Roth accounts

As you may know, if you have a Roth IRA, you don’t have to worry about RMD rules; these only apply to traditional, SEP, and other tax-deferred IRA accounts.

The new SECURE 2.0 rules have expanded that Roth exemption to also cover employer-sponsored Roth accounts. Prior to this, a Roth 401(k) had required withdrawals, the same as an ordinary 401(k). 

This rule takes effect in 2024.

Roth SEP and SIMPLE IRA Options

Before SECURE 2.0, savers participating in Simplified Employee Pension (SEP) IRAs and Savings Incentive Match PLan for Employees (SIMPLE) were limited to the traditional, tax-deferred option. With the SEP and/or SIMPLE Roth IRAs, it’s possible to make after-tax contributions and avoid RMDs later, while enjoying tax-free withdrawals in retirement.

This rule takes effect in 2023.

Employer-sponsored emergency funds

Employers may add an emergency savings account to their company retirement plan. This new feature is meant to give employees access to emergency funds so they don’t tap into 401(k) money before age 59 1/2—a move that triggers taxes and often a penalty.

This savings account is structured like a Roth, meaning you can deposit after-tax money, and up to four withdrawals per year are tax free. The limit you can save is $2,500 per year (your employer could set a lower cap, though). If you leave your company, you can take your emergency savings in cash or roll it into your Roth 401(k) or Roth IRA.

Some restrictions apply, so if your employer offers this option, be sure to get the specifics.

This rule takes effect in 2024.

The emergency withdrawal option

Another potential option if you need money to cover a financial curveball is a penalty-free loan of $1,000 from your 401(k) or IRA, once per year. This option will help if you have a personal or family emergency expense that is unforeseeable, but the idea is to keep this as a last resort. It’s not your go-to every time you need to get the brakes done. 

Caveat: This is a loan, not a withdrawal. If you don’t repay yourself within three years, no further emergency distributions will be allowed. 

This rule takes effect in 2024. 

An expanded saver’s credit

Until now, only certain people received nonrefundable tax credits for contributions to IRAs and 401(k) accounts. Thanks to a change to the “saver’s credit,” low and middle income earners will see a new kind of savings boost.

Starting in 2027, the newly named “saver’s match” will become something like a retirement contribution from the federal government—as long as you’re at least 18, are not a student or someone’s dependent, and have contributed to a retirement account. 

The saver’s match pays up to 50% of the first $2,000 you deposit in your retirement account (effectively that’s $1,000 per eligible person, per year). You can decide which account you want your saver’s match deposited to, but it cannot be a Roth account.

The match phases out for the following income ranges:

• $20,500 to $35,5000 for single taxpayers/married filing separately
• $30,750 to $53,250 for head of household
• $41,000 to $71,000 for those married, filing jointly 

The existing saver’s credit will experience minor changes over the next few years, but the real change is the 2027 shift from a tax credit to a federal retirement contribution to your existing retirement account. 

The main points of the new rule take effect in 2027. 

The bottom line

At its best, SECURE 2.0 lowers the bar so that millions more Americans will find it easier to save for retirement. It’s true that in some cases the terms can be confusing, but it’s worth the extra email or call to your HR rep (or financial advisor) to ask: How does this work, does it apply to me, and what do I need to do next?

At its worst, though, the added flexibility from the new SECURE 2.0 rules could create a kind of “retirement savings leakage.” When you’re truly short on cash, and have nowhere else to turn, dipping into your retirement nest egg could be the best option. But remember: Retirement plan rules are stringent for a reason. They’re meant to protect you from robbing your future self of the money required for a secure retirement. Proceed with care.