On December 23, 2022, the House joined the Senate in passing a $1.7 trillion federal spending bill that President Biden signed into law as soon as it appeared on his desk.
A vast and sweeping spending package (as you’d expect with any omnibus appropriations bill), it includes everything from $45 billion of emergency assistance for Ukraine to a ban on TikTok on government devices.
Of particular interest to future retirees though, will be the Secure Act 2.0.
Modeled on an earlier bill of the same name that was passed in 2019, this long-awaited legislation aims to significantly improve retirement savings rules, making it easier for Americans to set enough money aside for their golden years. But does it go far enough?
Despite tremendous bipartisan support for the Secure Act 2.0, some critics have pointed out potential limitations that may hinder its impact. Today, we dissect the issue, offering a comprehensive overview of what the act encompasses and how future retirees will benefit from it.
Table of Contents
- What is the Secure Act 2.0?
- Brief Recap of Secure Act 1.0
- What’s in Secure Act 2.0? Key Provisions
- 1. Automatic Enrollment in 401(k) and 403(b) Plans
- 2. Automatic Plan Portability
- 3. Age for RMDs Pushed Back
- 4. Employer Contributions for Student Loan Payments
- 5. Higher Catch-Up Contributions for Over 60s
- 6. $1,000 Emergency Access to 401(k)
- 7. Earlier Access for Part-Time Employees
- 8. Roll Over of 529 Plans into Roth IRAs
- 9. Establishing a Retirement Savings Lost & Found
- Secure Act Limitations
What is the Secure Act 2.0?
An acronym for “Setting Every Community Up for Retirement Enhancement”, the Secure Act 2.0 is a revised and expanded version of the original Secure Act of 2019.
Its basic goals were:
- To improve the rules around retirement
- To encourage people to save more for retirement
- To decrease the cost for employers of setting up retirement plans
Proponents of the act claim it will make American workers – especially people who have otherwise been excluded from workplace retirement plans – more able and inclined to save for their retirement via their IRA, 403(b), and/or 401(k) plans.
Before we dive into the new legislation’s specific contents, though, let’s take a look at Secure Act 1.0:
Brief Recap of Secure Act 1.0
The Secure Act of 2019 prompted the first significant changes to our retirement system in over 10 years. Signed into law by Donald Trump on December 20, 2019, it was an equally expansive bill that attempted to:
- Help people access tax-advantaged accounts and,
- Stop older individuals from outliving their assets
The incentive for creating the legislation stemmed from significant retirement-related problems that had long been acknowledged but were hitherto unaddressed.
For example, a mere 56% of the civilian adult population participates in a workplace retirement plan today – a figure that was even lower back in 2019.
And, adding insult to injury, the majority of Americans who do participate in them save nowhere near as much money as they should. Indeed, a 2022 analysis of over 5 million 401(k) plans by Vanguard revealed that the median balance was just $35,345.
That’s where the Secure Act of 2019 comes in.
Among many other provisions, it became easier for small business owners to create “safe harbor” retirement plans, which are both simpler and cheaper to administer. Owners of traditional IRAs were told they could keep making contributions ad infinitum as well. And the age that retirement plan participants had to make required minimum distributions (RMDs) increased from 70.5 to 72.
The end result was that workers of all ages would be in a stronger position to save for retirement.
What’s in Secure Act 2.0? Key Provisions
Building on the reforms of its legislative predecessor, the Secure Act 2.0 contains dozens of retirement-related provisions that promise to benefit everybody from part-time workers and military spouses to small-business employees and student loan borrowers. Here are 8 of the main ones:
1. Automatic Enrollment in 401(k) and 403(b) Plans
Until now, employers haven’t been required to enroll employees in new workplace retirement plans. From December 31, 2024 on, employees will be automatically enrolled in them. If someone doesn’t wish to participate, they will need to actively opt out of the plan.
As for automatic contribution rates, employers will have to set a rate of between 3% and 10%. That will increase by 1% per year until it hits at least 10%, but not higher than 15%.
2. Automatic Plan Portability
People who tend to set less money aside for retirement may often cash out their plans upon leaving a job rather than continuing to save in a new eligible retirement plan.
If you fall into a similar category, then this provision in the Secure Act 2.0 may make you reconsider. Starting in 2025, participants will be able to automatically transfer low-balance retirement accounts to a new plan when they get a new job. It can help make it easier to decide if you should rollover your 401(k).
3. Age for RMDs Pushed Back
Before the Secure Act of 2019, you had to start withdrawing a minimum amount of money each year (known as a required minimum distribution, or RMD) from your IRA or 401(k) as soon as you turned 70.5. If you didn’t, you’d be penalized by the IRS. The Secure Act of 2019 moved that age to 72.
Now, under the Secure Act 2.0, it’ll increase in 2023 to age 73 and then to age 75 in 2033. You’ll still face a penalty if you fail to take an RMD but it will be reduced. It’s decreasing from 50% of the RMD amount that didn’t take down to 25%.
4. Employer Contributions for Student Loan Payments
People with lots of student debt face a conundrum. Should they pay it off faster or to save for their retirement instead? If they choose the former, then their retirement funds suffer – and vice versa.
From December 31, 2023, this may become less of a problem (and that has nothing to do with the state of the Biden forgiveness plans). Under the Secure Act 2.0, employers will be able to make matching contributions to an employee’s retirement plan whenever they make a qualified loan repayment.
5. Higher Catch-Up Contributions for Over 60s
The catch-up contribution limit will now be indexed to inflation starting in 2024.
In 2022, anyone aged 50+ can put an extra $6,500 into their 401(k) on top of the current (2023) federal limit of $20,500. That’s $27,000 total.
In 2023, the limits increased to $22,500 with a catch-up of $7,500 – a total of contribution limit of $30,000 for those 50 and older. The bill did not affect these figures, they were already set to increase to those. (Thank you Daniel!)
If you are 60-63, you now fall into a new “catch-up” category. After January 1, 2025, your catch-up contribution limit will be the greater of:
- 50% more than the catch-up contribution limit in 2025 (remember, it’s now indexed to inflation).
There’s a caveat for high earners.
If you earn more than $145,000 in the prior calendar year, your catch-up contribution has to be made on a Roth basis. In other words, you can contribute more than the limit but it must be to a Roth account.
6. $1,000 Emergency Access to 401(k)
The Secure Act 2.0 will allow employees to withdraw up to $1,000 from their 401(k) every year for emergency expenses without paying the typical 10% penalty. Today, the rules for withdrawing from a 401(k) without penalty are quite rigid.
Note, you will still have to pay income tax on these withdrawals. But if you repay it within 3 years, you can get it refunded. If you don’t, you won’t be able to make another emergency withdrawal until that 3-year period is over.
7. Earlier Access for Part-Time Employees
Up to the time of writing, part-time employees are only eligible to participate in workplace retirement plans if they’ve been at the company for 3 years and have done at least 500 hours of work per year.
But in a bid to help part-time workers save for retirement, those limits are being reduced. As of December 31, 2024, you’ll only need to have worked for 2 years.
8. Roll Over of 529 Plans into Roth IRAs
This section increases the flexibility of 529 plans tremendously.
Under the new legislation, anyone holding 529 plan assets for 15 years will be allowed to roll them over to a Roth IRA for the beneficiary – assuming they:
- don’t exceed an annual lifetime limit of $35,000
- fall within annual Roth contribution limits.
Based on my read, once the account has been open for 15 years, you can start rolling it over into a Roth IRA as long as you follow other Roth IRA rules.
A few other rules apply here too, though so be sure to do some further research once we’ve had a chance to digest all the changes, but this does increase the flexibility of 529 plans.
9. Establishing a Retirement Savings Lost & Found
If you’ve ever tried to find a lost 401(k), you know it’s hard. Businesses have appeared to help solve this problem.
The bill tasks the Labor Department to create a national online searchable database to help people find their pension and 401(k) plans, based on the plan administrator. They have two years to make it.
Secure Act Limitations
Although Secure Act 2.0 promises a range of benefits for people’s retirement savings, the legislation isn’t without its detractors.
A central bone of contention revolves around how these provisions don’t help certain sectors of the population, such as the unemployed, or the countless employees who work for businesses that don’t offer retirement savings plans.
According to the BLS, people born between 1957 and 1964 held at least a dozen jobs on average from age 18 to 52. This practice creates significant gaps in employer-sponsored retirement savings – a state of affairs that’s exacerbated if, as we noted earlier, the individual chooses to cash out when they change roles and/or make withdrawals that incur penalty charges.
Overall, the Secure Act 2.0 may not help folks without access to retirement savings but it’s still a good step in the right direction.