Secure Act 2.0
The Secure Act 2.0 is a law that was signed by President Biden on December 29, 2022, with some aspects having taken effect immediately and some over the coming years.
This new law is a follow-up to the Secure Act of 2019 – the first major retirement legislation introduced in over a decade.
The Secure Act 2.0 is designed to enhance and expand retirement savings opportunities for all US residents, regardless of age, income, and circumstances. There are also changes to the tax rules and regulations that affect retirement accounts, such as 401(k)s, IRAs, and 529 plans.
So, is the Secure Act 2.0 law? Yes, it is, and here’s everything you need to know about it.
Why Was The Secure Act 2.0 Created?
Despite the improvements made by the Secure Act of 2019, there were still challenges and gaps that needed to be addressed. The SecureAct 2.0 was introduced to solve these problems, specifically in these areas:
- The lack of access to employer-sponsored retirement plans for many workers
- The low level of retirement savings and participation among many US citizens
- The increasing life expectancy and risk of outliving one’s retirement savings.
- The rising cost of education and student debt hindering one’s ability to save for retirement
- The complexity of the tax rules and regulations that apply to retirement accounts
How Does It Affect Retirement Savings?
The Secure 2 Act affects retirement savings in several ways, depending on your age, income, employment status, and the type of retirement account you have.
Here are the key changes:
- Increasing the age from when you must start taking required minimum distributions (RMDs) from traditional IRAs and 401(k)s from 72 to 73 in 2023 and then to 75 in 2033
- Reducing the penalty for failing to take RMDs from 50% to 25% of the amount not taken and further to 10% if corrected in a timely manner for IRAs
- Exempting Roth accounts in employer-sponsored plans from RMDs starting in 2024
- Increasing the catch-up contribution limits for 401(k)s, 403(b)s, governmental plans, and IRAs for those who are age 50 or older in 2025
- Allowing defined contribution plans to offer an emergency savings account associated with a Roth account
- Allowing employer-sponsored plans to include more part-time workers and long-term employees
- Allowing more flexibility for withdrawing funds from retirement accounts for certain purposes
- Creating a new tax credit for small employers who adopt automatic enrollment features in their plans
- Increasing the tax credit for small employers who start a new retirement plan or join a multiple employer plan (MEP) or pooled employer plan (PEP)
- Allowing more flexibility for transferring funds between different types of retirement accounts or plans without suffering additional taxes or penalties
What Key Changes Does It Make for Retirement Accounts?
Increased Contribution Limits for 401(k)s
The Secure Act 2.0 increases the contribution limits for 401(k)s and other similar plans for people aged 50 or older in 2025.
- The limit will increase from $6,500 to $10,000 for plans that have automatic enrollment features
- The limit will increase from $6,500 to $7,500 for plans that do not have automatic enrollment features.
This will be indexed for inflation after 2025.
Expansion of Eligible Retirement Plan Participants
The eligibility criteria for participating in employer-sponsored retirement plans is also improved and includes workers who are part-time, self-employed, or work for small businesses:
- Employers who offer a 401(k) plan must allow long-term part-time workers to participate if they work at least 500 hours per year for three consecutive years or at least 1,000 hours in one year
- Allows Employers who offer a defined contribution plan to join an MEP or a PEP with other employers without having to share a common interest or affiliation
- Allows employers who offer a defined contribution plan to join a PEP that is sponsored by a pooled plan provider (PPP)
- Lets self-employed individuals and small employers who do not offer a retirement plan to join an automatic IRA (automatically established and funded by payroll deductions)
More Flexible Withdrawal Rules for Retirement Accounts
The act also allows more flexibility for withdrawing funds from retirement accounts for certain purposes:
- You can withdraw up to $10,000 without triggering the 10% early withdrawal penalty if you use the funds to repay qualified student loans
- Up to $5,000 can be withdrawn without triggering the 10% penalty if the funds are used for qualified birth or adoption expenses
- Up to $100,000 can be withdrawn without triggering the 10% penalty if you are affected by a federally declared disaster
- You can withdraw funds from your employer plans without triggering the 10% penalty if you qualify for a hardship distribution
How Will the New Act Affect Emergency Distributions?
The Secure 2.0 Act allows defined contribution plans to offer an emergency savings account associated with a Roth account.
This means you can designate some of your Roth contributions as emergency savings accessible without taxes or penalties. However, there are limitations to this:
- The maximum amount that can be designated is $1,000 per year or 10% of your Roth contributions, whichever is the lesser amount
- It cannot exceed $5,000 in total at any time
- It cannot be invested in any assets other than cash equivalents
- It cannot be transferred into another plan or IRA.
- It cannot be used as loan collateral
How Specifically Does It Impact Small Businesses?
Small businesses are affected in different ways depending on whether they offer a retirement plan or not:
- A new tax credit of up to $1,500 per year is available for small employers who adopt automatic enrollment features
- The existing tax credit is increased for businesses that start a new retirement plan or join an MEP or PEP
- Tax credits are provided for plan contributions made by small businesses for employees whose wages do not exceed $100,000
- Employer matching contributions on a Roth basis is now allowed
How Are Part-Time Employees Affected?
Part-time employees are affected in several ways:
- From 2025, the service requirement will be reduced to two consecutive years of at least 500 hours per year
- From 2023, those with outstanding student loans will receive a tax credit of up to $1,000 per year for making contributions to a Roth IRA or a designated Roth account in an employer-sponsored plan
- From 2023, those who receive qualified foster care payments or difficulty-of-care payments as home healthcare workers can treat them as compensation
- From 2023, those who receive certain types of military survivor benefits can roll them over into an IRA or an employer plan without triggering taxes or penalties.
What Is the Impact on Education Savings Accounts?
The Secure Act 2.0 impacts education savings accounts, such as 529 plans and Coverdell education savings accounts (ESAs), in several ways:
- Those with 529 plans can roll over up to $10,000 per year into a Roth IRA without triggering taxes or penalties
- Those with Coverdell ESAs can roll over their balances into 529 plans without triggering taxes or penalties
- Those with IRAs or employer plans can withdraw up to $10,000 without triggering the 10% early withdrawal penalty if they use the funds to repay qualified student loans
Implications of the Secure Act 2.0 on IRA Account Holders
The Secure Act 2.0 has several implications for IRA account holders:
- The age from which you must start taking RMDs from traditional IRAs has been raised from 72 to 73 in 2023 and then to 75 in 2033
- The penalty for failing to take RMDs from traditional IRAs has been reduced from 50% to 25% of the amount not taken and to 10% if quickly corrected
- Those who inherit traditional or Roth IRAs from family members who died before reaching age 75 can delay the start of RMDs until the year in which the deceased would have turned 75
- Those who inherit traditional or Roth IRAs from family members who died after reaching age 75 can spread the RMDs over 15 years (previously ten years)
- Those who receive qualified foster care payments or difficulty-of-care payments as home healthcare workers can treat them as compensation for purposes of making IRA contributions
- Those who receive certain types of military survivor benefits can roll them over into an IRA without triggering taxes or penalties
What About 529 Plans?
The Secure Act 2.0 affects 529 plans in several ways, depending on whether they are used for education or retirement purposes:
- Those with 529 plans can roll over up to $10,000 per year into a Roth IRA without triggering taxes or penalties
- From 2023, those with Coverdell ESAs can roll over their balances into 529 plans without triggering taxes or penalties
- From 2023, those with IRAs or employer plans to withdraw up to $10,000 without triggering the 10% early withdrawal penalty if they use the funds to repay qualified student loans for themselves or their spouses, children, or grandchildren
What New Tax Rules May Come About as a Result of This Act?
The Security 2.0 Act introduces some new tax rules that may affect your own retirement savings:
- A new tax credit of up to $1,000 per year for those with outstanding student loans and who make contributions to a Roth IRA or a designated Roth account in an employer-sponsored plan
- Those who receive qualified foster care payments can treat them as compensation for purposes of making IRA contributions
- Those who receive difficulty-of-care payments as home healthcare workers can treat them as compensation for purposes of making IRA or employer plan contributions.
- Those who receive certain types of military survivor benefits can roll them over into an IRA or an employer plan without triggering taxes or penalties
- Those who inherit IRAs or employer plans from certain family members who died before reaching age 75 can delay the start of RMDs until the year in which the deceased would have turned 75
- Those who inherit IRAs or employer plans from certain family members who died after reaching age 75 can spread the RMDs over a 15-year period instead of a 10-year period
- Those who have 529 plans can roll over up to $10,000 per year into a Roth IRA without triggering taxes or penalties
How To Prepare for Possible Changes Related to the Secure 2.O Act
Since some aspects of the act can be more beneficial than others, it is important to review your current situation and goals and consider how the new law may impact them:
- Review and adjust your current retirement plan contributions
- Review and recalculate your current RMD strategy and start date
- Check and update your current beneficiary designations and estate planning documents
- Review your current education savings accounts and explore the new rollover options and withdrawal rules
- Check your current student loan situation and evaluate the new tax credit and withdrawal options for repayments
- Consult with financial professionals like Finvisor for more guidance and advice on how to make the best of the new act
Conclusions on How This Act Will Shape Retirement Savings for Years To Come
The Secure Act 2.0 is a much-needed update to the original Secure Act and is expected to benefit millions of Americans who were previously at significant risk of retirement insecurity.
And while it doesn’t solve all of the issues, with more incentives and flexibility offered, the US retirement system has become more of a level playing field for those that were previously excluded. This allows them to finish working at retirement age and experience greater financial security throughout their golden years.
If you run a business and would like to understand more about The Security Act 2.0 and how to take advantage of and benefit from it, our team at Finvisor is more than happy to discuss it with you. Get in touch today and discover Finvisor’s wide range of accounting, financial, and HR services on offer.
To learn more about what we do, or to request a quote, contact us at hello@finvisor.com or 415-416-6682. We’re here to help you navigate deferred revenue journal entries so you can make the most of your assets!
*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*
- Last Modified
- April 25, 2024
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