New rules for retirement savings are on the way, thanks to the SECURE 2.0 Act, signed into law on December 29, 2022. The provisions of SECURE 2.0 are intended to encourage retirement saving and remove some of the barriers that make people reluctant to stash their money in retirement accounts. Additionally, SECURE 2.0 incentivizes small businesses to provide retirement plans for their employees—and encourage participation in the plans they offer.
SECURE 2.0 has more than 50 provisions that impact retirement savings. Some will take a few years (or more) to fully implement, but here are eight ways SECURE 2.0 could change the way you save for retirement.
1. Rolling Leftover 529 Funds Into a Roth IRA
Starting in 2024, funds left in a 529 education account after paying for qualifying education expenses may be rolled into a Roth IRA. Parents can now worry less about over-saving in a 529, as funds that aren't used to cover educational expenses can roll into a Roth IRA without penalty. Here are a few rules that will apply:
- The Roth IRA will belong to the beneficiary, typically the child whose education you're funding.
- The 529 must be open for more than 15 years.
- Rollovers are capped at $35,000 total.
- Rollover contributions are subject to annual Roth IRA contribution limits.
- The beneficiary must have earned income that's at least equal to the amount of the rollover.
2. Making Larger Catch-up Contributions
Beginning in 2025, you can make additional catch-up contributions to your 401(k), 403(b) or governmental 457(b) retirement plan if you are ages 60 to 63. In 2023, you can contribute an additional $7,500 per year if you are age 50 or older. Under new rules, if you're ages 60, 61, 62 or 63, you can make an additional catch-up contribution of $10,000 or 50% more than your regular catch-up contribution (whichever is greater). The catch-up contribution limit will be adjusted for inflation.
3. Matching Student Loan Payments
Because paying off student loans can make it more difficult to save for retirement, this new provision allows your employer to match your qualified student loan payment with a contribution to your 401(k), 403(b), 457(b) or SIMPLE IRA. Contributions are matched at the same rate as your regular retirement contributions: If your employer matches your 401(k) contribution at 50%, your student loan payment amount would be matched at 50% as well. This rule goes into effect in 2024.
4. Changes to Employer Retirement Plans
The SECURE 2.0 Act makes a number of changes to employer-sponsored retirement plans, including a new rule that allows employers to offer small-dollar incentives to employees who enroll in a 401(k) or 403(b). Here are a few additional changes:
Small-business startup credit: Employers with up to 50 employees may now deduct up to 100% of the administrative costs of setting up a small employer pension plan and may claim an additional credit of up to $1,000 per qualifying employee. The additional credit is calculated as a percentage of the employer's qualifying contribution on an employee's behalf: 100% for the first and second years, 75% in the third year, 50% in the fourth year and 25% in the fifth year, after which it phases out. The credit doesn't apply to defined benefits plans.
Automatic enrollment: Starting in 2025, businesses will be required to automatically enroll employees in 401(k) or 403(b) plans as soon as they become eligible to participate. The initial automatic enrollment amount is 3% to 10% of an employee's wages, and increases 1% per year up to a maximum of 10% to 15%. Employees may opt out if they choose.
Benefits for part-time employees: Part-time employees will be eligible to participate in their employer's 401(k) or 403(b) plan after two consecutive years of service, versus three years under the current rules.
Starter 401(k) or safe harbor 403(b) plans: Employers that don't currently sponsor retirement plans can offer a starter 401(k) or safe harbor 403(b) plan with contribution limits that match IRA contribution limits. This provision goes into effect in 2024.
5. Emergency Savings Linked to Retirement
Starting in 2024, employers have the option of creating pension-linked emergency savings accounts for their employees. Employees can contribute up to 3% of their salaries and employers can match employee contributions as they would with other elective deferrals—up to $2,500 per year (or less, as set by the employer). The first four withdrawals in a year are made without penalties.
6. Penalty-Free Withdrawals in Qualifying Circumstances
The SECURE Act 2.0 includes new exceptions to the 10% additional tax on early distributions from retirement plans. Typically, when you withdraw money from an IRA or employer-sponsored retirement account before the age of 59½, your withdrawal is subject to regular income taxes and a 10% early withdrawal penalty. The following new exceptions will allow you to withdraw money from retirement under limited circumstances.
- Financial emergency: Employees who are experiencing financial hardship may withdraw up to $1,000 to cover an unforeseen emergency expense. Only one distribution is allowed per year. You may repay the distribution within three years, but if you don't repay it, you must wait three years to make another withdrawal.
- Domestic abuse: To provide access to funds for people needing to escape domestic abuse, anyone who is experiencing domestic abuse may withdraw up to $10,000 or 50% of their retirement account (whichever is less) without penalty. They may pay back these funds over three years and receive a refund for income taxes paid on their withdrawal.
- Federally declared disasters: Individuals affected by federally declared disasters occurring on or after January 26, 2021, may withdraw up to $22,000 from their IRA or employer-sponsored retirement plan without penalty. The withdrawal will be taken into account as gross income over three years and may be repaid to the account.
- Terminal illness: Retirement account holders who are terminally ill may withdraw money without an early withdrawal penalty.
7. New Rules for Required Minimum Distributions
To discourage retirement savers from using tax-advantaged retirement accounts to pass along inherited wealth, the government imposes required minimum distributions (RMDs) on traditional (not Roth) IRAs and employer-sponsored retirement accounts. Under SECURE 2.0, some RMD rules are changing. The age at which you must begin taking RMDs is increasing, from 72 to 73 in 2023, and to 75 in 2033. SECURE 2.0 also eliminates the RMD requirement for employer-sponsored Roth plans, such as Roth 401(k) accounts, starting in 2024.
8. Updates to the Saver's Credit
The nonrefundable Saver's Credit is being replaced by the Saver's Match. Starting in 2027, the government will offer 50% of up to $2,000 per person in federal matching funds to be deposited into your IRA or retirement plan account. The match begins phasing out at $20,500 in income for single taxpayers and $41,000 for married couples filing jointly.
9. Retirement Savings Lost and Found
If you've lost track of retirement benefits you earned at a company that moved, closed down, changed its name or merged with another company, a new national online database may help you locate your funds. This searchable database being developed by the Department of Labor will help connect retirement savers with the plan administrators for their "lost" pension and retirement plans.
The Bottom Line
SECURE 2.0 contains a number of new provisions aimed at making it easier for individuals to save for retirement—and for employers to help employees get there. New rules that allow savers to roll leftover 529 funds into Roth IRAs or withdraw funds penalty-free under certain circumstances may encourage people to save more for retirement, knowing they can maintain and access their funds even if their needs evolve.
SECURE 2.0's provisions may take a few years to go into effect. In the meantime, it's always a good time to revisit your budget, check on your credit score and report, and evaluate your long- and short-term retirement goals.