The House and Senate finally approved the Secure Act 2.0. That's a long-discussed package of changes to retirement savings rules. That's intended to make it easier for Americans to build retirement savings and less costly to withdraw those savings.
The new rules are part of a big, $1.7 trillion, so-called omnibus federal government spending package.
The package is named after 2019 legislation called the Secure Act. It will also enable more workers to have workplace retirement plans and to have an income stream in retirement.
Secure Act 2.0
The spending package, including Secure 2.0, now goes to President Joe Biden for enactment.
But the fine print in many of the new provisions tarnishes their luster. "Several don't take effect right away, sometimes for years," said certified public accountant Ed Slott, an IRA specialist in Rockville Centre, N.Y.
In addition, Secure Act 2.0 adds to the list of exemptions from penalties for early withdrawals from retirement savings. Among the new exceptions are loopholes for victims of domestic abuse, natural disasters and financial emergencies.
Those are intended to make it easier for workers to withdraw retirement savings early for reasons unrelated to retirement. "I get it — if people have an emergency, they want to get at their cash," Slott said. "But then when they get old and retire, what are they going to live on?"
Aid Based On Student Loans
Other new provisions of Secure Act 2.0 allow employers to make 401(k) matching contributions based on a worker's student loan payments.
Another new provision allows workers to open emergency savings accounts inside their 401(k) plans.
Further, new rules will let people make tax-free and penalty-free rollovers from 529 college savings plans to Roth IRAs, subject to certain limitations.
Also, for the first time, SEP and Simple IRAs will be able to accept Roth contributions, which are made with after-tax dollars.
RMDs Start Later
Here are five sets of new Secure Act 2.0 rules. We explain their key points. But each has fine-print limitations — their "yes-but" details. We explain those too.
Delay of starting age for required minimum distributions. RMDs are mandatory yearly withdrawals from most IRAs and 401(k) accounts. The starting age for RMDs used to be shortly after you turned 70-1/2. Then it was pushed back to age 72. Now Secure Act 2.0 delays the start of RMDs to age 73.
- Yes, but ... The age-73 starting age kicks in as of 2023. But that new, later starting age is only for people who turn 72 in 2023 or later. Other people still must start RMDs at 72.
- Yes, but ... The starting age for everyone gets further delayed to age 75. But that does not take effect until 2033.
- Yes, but ... Individuals who have already started RMDs cannot stop.
Lower Penalties
Lower penalty for missed RMDs. Under the old rules, if you fail to take an RMD on time, you face tax and a whopping penalty of 50% of the amount you were supposed to withdraw. Secure Act 2.0 replaces that 50% with a 25% penalty. The penalty is even lower, just 10%, if you correct your mistake after the fact.
- Yes, but ... Under the old rules, savers rarely paid the 50% penalty due to appeals and the IRS' awareness of the harshness of the size of that penalty, Slott says. But Slott wonders whether the IRS will still exercise as much leniency once the penalty has been trimmed.
IRA Catch-Up Contributions
Bigger IRA catch-up contributions. The annual cap on regular IRA contributions is $6,000 now, $6,500 in 2023. People who are age 50 or older can make catch-up contributions of up to $1,000 a year. Catch-up contributions have not been adjusted for inflation. But Secure Act 2.0's new rules will increase that $1,000 ceiling for inflation.
- Yes, but ... The cost-of-living adjustment does not start until 2024.
- Yes, but ... The inflation adjustments will be in $100 increments. So if inflation is, say, 8% in one year, the contribution cap will not rise $80. The ceiling will not increase until inflation cumulatively increases enough to allow at least a $100 boost.
Sky-High 401(k) Help
Bigger 401(k) and 403(b) catch-up contributions. Under the old rules, the cap on catch-up contributions is $6,500 in 2022 and $7,500 in 2023. Under the new rules the cap will become at least $11,250, adjusted for inflation. (A 403(b) plan is like a 401(k) plan but for public schools and charities.)
- Yes, but ... The new, higher contribution cap rule will not take effect until 2025.
- Yes, but ... Inflation adjustments start in 2026.
- Yes, but ... The new ceiling will only be for people who are age 60 to 63.
Secure Act 2.0 Auto-Enrollment
Automatic enrollment in 401(k) and 403(b) plans. Under the new rules, any employer that starts a new plan must automatically enroll newly hired workers, when eligible, and start their contributions at 3% of their pay. That contribution rate must increase by 1 percentage point annually until it reaches 10% to 15% of the worker's pay. A worker can kick in more if they choose, up to any other limits.
- Yes, but ... The new auto-enrollment, auto-deferral and auto-escalation rules won't apply to businesses with 10 or fewer workers, or to companies in business for less than three years.
- Yes, but ... The new rules won't start until 2025.
