Secure Act 2.0 and Your Money
America has a retirement savings problem. According to The State of Personal Finance, more than 4 out of 10 (42%) Americans aren’t saving for retirement and more than half (56%) of Americans feel behind on their retirement savings goals.
Back in 2019, Washington tried to encourage more Americans to save for retirement by passing the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Fast forward a few years, and Congress is trying to go even further with a follow-up bill, appropriately known as the SECURE 2.0 Act of 2022.
What Is the SECURE 2.0 Act?
Passed in the final days of 2022 as part of a massive omnibus spending bill, the “new-and-improved” legislation lays out a new set of retirement rules designed to make it easier for you to save for retirement and access your money.1,2
Will SECURE 2.0 accomplish that? We won’t know for years what effect this law will have on retirement savings, but there’s reason to be hopeful.
There are some provisions in this bill that might help with America’s retirement savings crisis and encourage more Americans to save for their future. On the other hand, there are some changes that could open the door for bad decisions.
Here are some of the major highlights of SECURE 2.0 you need to know about:
- The required minimum distribution (RMD) age rises to 73.
- You won’t have to take required minimum distributions from Roth 401(k)s and Roth 403(b)s.
- You’ll face smaller penalties for missed required minimum distributions.
- Higher catch-up contributions are on the way.
- It’ll be easier to access retirement funds for emergencies.
- Employers must automatically enroll you into a workplace retirement plan.
- Employers can match your student loan payments with retirement contributions.
- You can roll over unused 529 plan funds to a Roth IRA.
- Roth options will be available for SIMPLE IRAs and SEP IRAs.
- There’s a new emergency savings account option alongside retirement accounts.
Let’s walk through each one together and find out what these changes might mean for you and your retirement.
1. The required minimum distribution (RMD) age rises to 73.
One of the major highlights of SECURE 2.0 is that the new law increases the age when owners of tax-deferred retirement accounts—like a traditional 401(k) or traditional IRA—have to start taking money out of their retirement accounts.
Before the new law went into effect, the required minimum distribution (RMD) age was 72. That means once you turn 72, you have to take a certain amount of money out of your tax-deferred account out and pay taxes on it.
As of January 1, 2023, the RMD age is now 73. This is good news because it lets your money keep growing in your tax-deferred account (if you don’t need to take money from it). Hooray!
If you turned 72 before January 1, 2023, you’re out of luck—you need to continue taking out distributions. But if you’re turning 72 this year and have already scheduled your withdrawals, you might want to talk to your financial advisor and rethink that approach.
And looking a little further down the road, the RMD age is set to rise again to age 75 in 2033.3
2. You won’t have to take required minimum distributions from Roth 401(k)s and Roth 403(b)s.
And speaking of RMDs: Did you know Roth 401(k)s have the same required minimum distribution rules as traditional 401(k) accounts? It’s true . . . even though you’ve already paid taxes on the money you contribute to a Roth 401(k). Thankfully, that won’t be the case much longer.
SECURE 2.0 aligns the rules for workplace Roth accounts—like Roth 401(k)s and Roth 403(b)s—with Roth Individual Retirement Account (IRA) rules. Starting in 2024, you’ll no longer be forced to take minimum distributions from Roth accounts in workplace retirement plans. To which we say . . . it’s about time!
3. You’ll face smaller penalties for missed required minimum distributions.
The penalty for not taking an RMD will drop to 25% of the RMD amount (before the law passed, it was 50%) starting in 2023. And for traditional IRA owners, that penalty falls to 10% if you withdraw the RMD amount you were supposed to take and submit a corrected tax return in a timely manner.
4. Higher catch-up contributions are on the way.
Many Americans look up one day and realize they’re nearing retirement age with nowhere near enough saved in their nest egg. Catch-up contributions help folks age 50 and older save a little extra each year. And if that’s where you are today, now you’ll be able to save even more!
For 2023, the catch-up amount for folks age 50 and older is $7,500.4 And starting January 1, 2025, investors age 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. If you make more than $145,000 each year, though, the law says you won’t be able to save as much.
5. It’ll be easier to access retirement funds for emergencies.
The government wants to make retirement funds easier to get to in case of an emergency without having to face penalties or fees. Starting in 2024, you can withdraw up to $1,000 from a retirement account for personal or family emergencies. But you’d have to replace those funds in the next three years before you can make another similar withdrawal.
This sounds like a good thing. But you better think twice (maybe three times) before you even think about raiding your retirement funds for an emergency. Taking money out of your retirement accounts could cost you thousands of dollars in future investment growth and might lead to a bigger tax bill. Don’t do it.
Taking money out of your retirement accounts should be a last resort to help you avoid bankruptcy or foreclosure—and that’s it. It’s the nuclear option after you’ve exhausted every other avenue you can find.
That’s why you should always have a fully funded emergency fund with 3–6 months of expenses saved up before you start investing for retirement. Emergency funds are for emergencies. Retirement accounts are for retirement. Capeesh?
6. Employers must automatically enroll you in a workplace retirement plan.
If you wanted to start putting money in your 401(k) or other similar workplace retirement plan, you’d have to sign up and enroll yourself. But beginning in 2025, employers will be required to automatically enroll employees in their workplace plans, starting with a minimum contribution rate of 3% (but you can choose to opt out any time you want).
The thinking here is that folks are less likely to opt out of their workplace plan than they are to opt in, which means more folks will be participating in their workplace retirement plans thanks to this change.
If you’re out of debt and have an emergency fund in place, then this is fine—you just need to adjust your contributions and choose your investments accordingly.
But what if you’re still on Baby Step 2 or 3 (which means you’re either trying to get out of debt or save up an emergency fund)? In that case, you should opt out of your company’s 401(k) plan and stop all retirement investing so you can get debt out of your life and save money faster.
And then, once you’ve paid off all your debts (except the house) and have 3–6 months of expenses saved in an easy-to-access savings account, you can opt back into your 401(k).
But, again, this portion of SECURE 2.0 doesn’t go into effect until 2025—so you still have plenty of time to become debt-free and save up a pile of cash!
7. Employers can match your student loan payments with retirement contributions.
Starting in 2024, your company can match your student loan payments with retirement contributions. This rule change is really interesting. It gives workers saddled with debt a huge incentive to pay off their student loans faster and helps them get a jump start with their retirement savings. Talk about a win-win.
So, let’s say you get a new job next year making $100,000 and your employer offers you a 3% match on 401(k) contributions, but you’re still working on getting Sallie Mae out of your life for good. If your employer offers student loan payment matching, they’ll match up to $3,000 of your student loan payments with 401(k) contributions. That’s a sweet deal!
8. You can roll over unused 529 plan funds to a Roth IRA.
Here’s another neat rule change: Beginning in 2024, you can roll over any unused money from a 529 education savings plan into a Roth IRA for the plan’s beneficiary. And you can do that without paying income taxes or penalties on the rollover (as long as the contributions to the 529 plan weren’t made in the last five years).
So if little Johnny or Susie gets a full-ride scholarship, goes to a less expensive school, or doesn't go to college at all, you can move that money into a Roth IRA in their name.
Just a few things to remember:
- Do not (we repeat, do not) withdraw money from a 529 plan and transfer it into a Roth IRA before the 529 plan provision goes into effect in 2024. If you do, it will count as a nonqualified withdrawal and you will have to pay taxes on those funds. Wait until 2024!
- The 529 plan must have been open for at least 15 years to qualify for the transfer.
- Any contributions to a 529 plan made in the last five years are not eligible for tax-free transfers to a Roth IRA.
- These rollovers are subject to the annual Roth IRA contribution limit and there’s a lifetime transfer limit of $35,000. We don’t know what the contribution limit for 2024 is yet, but for reference, you can save up to $6,500 into IRA accounts in 2023.5
9. Roth options will be available for SIMPLE IRAs and SEP IRAs.
Small-business owners and employees, rejoice! From 2023 onward, there’ll be Roth options for Savings Incentive Match Plan for Employees (SIMPLE) or Simplified Employee Pension (SEP) plans.
This is great news for small-business owners and their employees, who now have the option to invest with after-tax dollars and enjoy the benefits of tax-free growth and withdrawals through their workplace plans.
10. There’s a new emergency savings account option alongside retirement accounts.
Starting in 2024, retirement plan sponsors can enroll non-highly compensated employees (employees who make under $150,000 in 2023) to set aside up to $2,500 annually in a separate emergency savings fund alongside their retirement accounts. Think of this emergency savings account as one of those sidecars that attach to a motorcycle (which is the retirement account in this metaphor).
You could put money into this emergency savings account automatically through a payroll deduction, and the first four withdrawals in a year wouldn’t be subject to any taxes or penalties. Depending on your employer, your contributions could also be eligible for an employer match.
The idea behind this is a good one: It’s important for everyone to have money set aside for an emergency. But there are two glaring problems with this option.
First, while $2,500 is a good start, it isn’t nearly enough for your emergency savings. We recommend having 3–6 months of expenses saved for emergencies once you’ve paid off your debt. Just think about how much you spend in a month—between your mortgage (or rent), groceries, gas, transportation, insurance and everything else, $2,500 probably isn’t even enough to cover one month of essential expenses, let alone three months.
And second, you’re better off saving money in an online savings account or money market account that’s separate from your workplace retirement account. That way, you won’t have to worry about rolling over your emergency savings to a different account when (not if) you leave your job, which is ironically when you might need that money the most!
Work With an Investment Pro
That was a lot of information to process. Chances are, you still might have questions about how SECURE 2.0 will impact the way you and your family save for retirement. If that’s the case, you should meet with your financial advisor or investment pro to talk things over.
Don’t have a pro? The SmartVestor program can connect you with up to five investment pros in your area who will sit down with you and answer any questions you have about IRA rollovers, catch-up contributions and more. Plus, they can help you set up a plan to start saving for retirement.