June 26, 2024

Understanding the Implications of the Secure Act 2.0 on Your Retirement Planning

The Secure Act 2.0 represents a significant update to retirement planning regulations, building upon the initial Secure Act of 2019. This new legislation, passed as part of a nearly $2 trillion spending package, introduces several provisions aimed at enhancing the retirement savings landscape for Americans. Key changes include automatic enrollment in 401(k) plans, changed to ages for required minimum distributions (RMD’s), 529’s to Roth IRA conversions and many more.

Starting in 2025, new 401(k) plans will require automatic enrollment of employees at a 3% pre-tax contribution rate, which will increase annually by 1% until it reaches 10%. This mandate applies to companies that have been in business for more than three years and have more than ten employees. The goal here is to boost retirement savings from the outset of employment, although employees can opt out. This change could significantly increase retirement savings participation rates among workers.

The age for Required Minimum Distributions (RMDs) has been incrementally increased. In 2023, the age moved from 72 to 73 and is scheduled to rise to 75 by 2033. This delay allows more time for retirement funds to grow, which could be integral in managing longevity risk as lifespans extend.

An interesting provision of the Secure Act 2.0, is that it allows for the rollover of up to $35,000 from a 529 plan to a Roth IRA, provided the 529 has been funded for at least 15 years. This option, available under specific conditions, offers a flexible solution for those who find themselves with excess funds in a 529 plan due to overfunding or changes in educational needs.

For individuals aged 60 to 63, the act introduces a new tier of catch-up contributions to 401(k) and 403(b) plans, starting in 2025. This provision allows for either $10,000 or 50% more than the standard catch-up amount, whichever is greater, providing a significant opportunity for older workers to accelerate their savings as they near retirement.

A change for employers offering 401(k) plans is that they can now choose to direct their matching contributions into an employee’s Roth 401(k) instead of a traditional 401(k). While this option might be less attractive to employers due to the lack of a tax deduction, it provides employees with the potential for tax-free growth and withdrawals on these matched funds.

Starting in 2024, Roth 401(k)s will no longer be subject to Required Minimum Distributions, aligning them more closely with Roth IRAs. This change offers better tax planning flexibility, allowing individuals to let their investments grow tax-free for longer periods. The act has also expanded the Roth contribution options to include those with SIMPLE IRAs and SEP IRAs. This change provides self-employed individuals and small business employees more opportunities for tax-free investment growth.


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Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
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