Understanding the Secure Act 2.0

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On December 23, 2022, President Biden signed into law the Securing a Strong Retirement Act of 2022. Also known as the SECURE Act 2.0, this act builds upon and expands the Setting Every Community Up for Retirement Enhancement (SECURE) Act that President Trump signed into law three years earlier, on December 20, 2019.

What’s in the Secure Act 2.0?

The SECURE Act 2.0 has made several changes to retirement-related tax laws, particularly those relating to:

  • Required minimum distributions
  • Catch-up contributions for older Americans
  • 401(k) matching
  • 529 plans and Roth IRAs

While the SECURE Act 2.0 made other changes, here are those most relevant to retirees and soon-to-be retirees.

Required Minimum Distribution (RMD) Changes

Participants in certain kinds of retirement accounts must take a minimum amount of distributions from these accounts every year. There are steep penalties for failing to take required minimum distributions or RMDs. However, the SECURE Act 2.0 loosened some of the RMD rules by:

  • Raising the age at which individuals must start taking RMDs from age 72 to age 73 beginning in 2023 and to age 75 beginning in 2033
  • Decreasing the penalty for neglecting to take an RMD from 50% of the RMD amount to 25% of the RMD amount
  • Eliminating the RMD requirement from employer-sponsored Roth accounts beginning in 2024

This change benefits retirees who want to let as much principal as possible grow tax-free or tax-deferred in their retirement accounts without requiring they take distributions they don’t necessarily need to fund their retirement.

Increased Catch-Up Contributions for Those Ages 60-63

Americans aged 50 or older who participate in an employer-sponsored plan such as a 401(k) or 403(b) can contribute an additional amount beyond the standard employee contribution limit. This amount was $6,000 per year for 2015-2019, $6,500 for 2020-2022, and $7,500 for 2023. However, the SECURE Act 2.0 provides a special catch-up contribution for Americans aged 60 through 63. Beginning in 2025, Americans in this age range can make catch-up contributions of up to $10,000. In future years this amount will be indexed for inflation.

This change most benefits those in their early 60s who want to contribute as much as possible to their workplace plan before retiring.

Roth Requirement for Catch-Up Contributions

Beginning in 2024, those aged 50 or older who made over $145,000 in the previous tax year must make all catch-up contributions to a Roth account.

Roth Matching for Employer-Sponsored Plans

One perk many employers offer their employees is a match on employees’ 401(k) contributions up to a certain limit.

A common 401(k) matching program is for the employer to match contributions at a rate of 50 cents for every dollar an employee contributes to their 401(k) up to 6% of their annual salary. So if an employee who makes $100,000 a year contributes $1,000 to their 401(k), their employer would contribute $500; if that same employee contributes $10,000 to their 401(k), their employer would contribute $6,000.

Before the SECURE Act 2.0, employers could only make matches for employees to a pre-tax account, even if the employer contributed to a Roth 401(k). This means that employees who elected to contribute to a Roth 401(k) would see their employer matches contributed to a separate, pre-tax—that is, non-Roth—account.

The SECURE Act 2.0, however, now makes it possible for employees to elect for their employer to make matching contributions to a Roth account. However, employees should keep in mind that they will be taxed in the contribution year for any employer contributions made to a Roth account.

This change benefits those employees who want to fund their employer-sponsored plans with only post-tax dollars.

529-to-Roth-IRA Rollovers

The Secure Act 2.0 also allows parents to roll over assets of up to $35,000 in 529 plans to a Roth IRA in the beneficiary’s name. The plan must have existed for a minimum of 15 years to be eligible.

These rollovers would be subject to the annual Roth IRA contribution limits for the year, meaning that the employee may need to spread the rollovers over several years to avoid making excess Roth contributions.

Also, any Roth IRA contributions the beneficiary makes directly for the year will reduce the amount eligible to roll over from a 529 plan to a Roth IRA for that year.

Note that the income limits on Roth IRA contributions do not apply to these new 529-to-Roth rollovers.

This change benefits parents of children or other beneficiaries who did not exhaust all of their 529 plan assets to fund their education. Rather than figuring out what to do with the unused 529 plan assets, the beneficiary can now strategically reallocate these assets toward their retirement.

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