SECURE 2.0 Act: Helping Americans Save Earlier and Longer for Retirement

By Matt Rogers, Director of Financial Planning at Fidelity’s eMoney Advisor

SECURE 2.0 Act, signed into law December 29, 2022, continues many of the same themes found in the original SECURE Act—making retirement planning simpler, more accessible, and better matched to current demographics. 

While there are many changes in this regulatory update, there are some obvious provisions that will have the most impact to everyday retirement planning. 

RMD Changes Benefit Those Who Work Longer

Required Minimum Distributions (RMDs) are being pushed back even further. Previously, owners of most retirement plans had to start taking withdrawals at age 70.5. The first SECURE Act pushed that to 72, and now SECURE 2.0 Act pushes it back to 73 in 2023, and then to 75 in 2033.

This is to help address the fact that people are working longer and don’t want or need to start accessing their retirement plan balances until later in life. This gives people more time to work, even a part-time job, and allow for more growth before the government forces you to take withdrawals.

Another huge RMD benefit is the elimination of RMDs within the Roth portion of employer-sponsored retirement plans. 

Currently, RMDs apply to the entire balance of those plans, even if part of the money is inside a Roth account. SECURE 2.0 Act removes RMD requirements for these Roth accounts, putting them on equal footing to Roth IRAs, which never had RMDs. This is again very friendly to people who work longer, need more time to let balances grow, and don’t want to have to take withdrawals too soon. 

At the same time, employees can keep their employer plans longer. People commonly rolled the pre-tax portion of their Roth 401(k)s, for example, into an IRA when they retired, and they rolled the Roth portion into a Roth IRA to shield it from RMD rules. Now retirees can keep their money inside their employer plan without being subject to RMDs.

Increased Catch-Up Contributions Help Employees Stay on Track

In another example of matching the law to current demographics, SECURE 2.0 Act increases catch-up contributions in two important ways for those nearing retirement.

The first change allows the current $1,000 IRA catch-up contribution limit for people 50 and older to be indexed for inflation starting in 2024. This will help those who need to enhance their savings later in their career.

The second increase in catch-up contributions starts in 2025 and is only for employees age 60-63 still using their workplace retirement plans. 

These employees will be able to make bigger catch-up contributions based on the larger of 1) $10,000 indexed for inflation or 2)150% of the regular 2024 catch up amount. Currently this is $7,500, which becomes $11,250 when adjusted by 150%. So, for the near future, the higher of the two values is likely to be the second option, which is a healthy increase in catch-up contributions for employees age 60-63.

A critical detail for catch-up contributions to workplace retirement plans, however, is that if you made more than $145,000 in the prior calendar year, catch-up contributions must be made to a Roth account. 

This will likely prompt most plan sponsors who are not supporting Roth 401(k)s and Roth 403(b)s to add a Roth option to their plan. If an employer does not have a Roth option, high-earning employees will not be able to make catch-up contributions. If this is the case, even those earning under the $145,000 threshold would likely not be able to make use of catch-up contributions, so that all employees have equal access to benefits.

Why this rule for catch-up contributions? These provisions incentivize people to make those extra catchup contributions when needed, while also promoting the use of Roth accounts, which are a valuable service for consumers. Also, Roth money is taxed once up front, so this rule gives the IRS an influx of tax revenue to help pay for the new bill.

A Student Debt “Match” and Auto Enrollment Support Those Starting Out

One of the more interesting ideas in SECURE 2.0 is allowing employers, starting in 2024, to “match” student loan payments payments into a retirement account. For example, if an employee enjoys a 5% company match, then every $1,000 of student debt payments could result in $50 of employer-matched payments into their workplace retirement plan.

In addition to this, starting in 2025, businesses with 401(k) and 403(b) plans must automatically enroll eligible employees, starting at a contribution rate of at least 3%. These plans will also have automatic portability when people change jobs. It is hoped the combination of these provisions will help employees save more for retirement and keep their retirement plans active instead of cashing them out when they leave a job.

These changes are yet another reflection of evolving demographics where younger employees are saddled with student loans, unable to both save for retirement and pay down their loans. Now, some of those loan payments will be matched by the employer, and those plans can be taken to other jobs, helping those early in their career build a stronger foundation for retirement.

Making Retirement More Accessible for All

SECURE 2.0 Act will affect retirement planning by making Roth accounts easier to establish, which in turn reduces the risk of future taxation and minimizes the impact of RMDs. Employer-provided plans will be easier to set up and start contributing to, especially for those who are just beginning their career and face large amounts of student debt.

SECURE 2.0 Act is an extension of the original SECURE Act in many ways. The key provisions around Roth accounts, RMDs, and support for younger Americans offer a number of advantages in retirement planning, with the ultimate goal of helping more people retire comfortably.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.