The Secure 2.0 Act of 2022, a provision included in the $1.7 trillion spending bill signed by President Joe Biden on December 29, 2022, makes significant changes to the rules for retirement accounts like 401(k) plans, IRAs and Roth IRAs. The Act builds on the Secure Act of 2019 which aimed to enhance retirement savings for Americans.
One of the most significant changes for many Americans is the extension of the age for required minimum distributions (RMDs) and increased "catch-up" limits for people over 60. RMDs are the minimum amount that you must withdraw from your retirement account each year, and under the new rules, the age for RMDs will be raised to 73, starting on January 1, 2023, and further to 75, starting on January 1, 2033. Additionally, the penalty for failing to take RMDs has been reduced from 50% to 25% and further to 10% if the error is corrected in a timely manner.
Another important change is the contribution limits for 401(k) plans and IRAs. The standard limits for contributions will not change, but the law will boost the "catch-up" limit for Americans over 50 and introduce additional potential "catch-up" contributions for those older than 60. Starting in 2024, instead of a flat $1,000 more, older Americans will be able to contribute an additional amount that is indexed to inflation.
Additionally, the law will repeal and replace the IRA tax credit, also known as the "Saver's Credit." Those who qualify will receive a federal matching contribution to a retirement account starting with the 2027 tax year. The law also specifies that employees will be allowed to self-certify their emergencies for early withdrawals, and eliminates the penalty for those who are terminally ill.
The Secure 2.0 Act of 2022 also includes relief for Americans impacted by natural disasters, allowing them to withdraw up to $22,000 from employer plans or IRAs without penalty in the case of a federally declared disaster. The new rules will also let those with 403(b) plans make early withdrawals similar to 401(k) plans starting in 2025.
For employers and employees
The Secure 2.0 Act of 2022 is set to bring significant changes to the way employers manage and administer retirement accounts for their employees. These changes will have a significant impact on both employers and employees, and it is important for both to be aware of the key provisions of the act.
One of the biggest changes for employers is the requirement that any new 401(k) or 403(b) plans must automatically enroll workers who don't opt-out. Starting in 2025, contributions from workers automatically enrolled will start at a minimum of 3% and a maximum of 10%. Each year after 2025, those amounts will rise 1% until they reach a range of 10% to 15%. Retirement plans created before 2025 will not be subject to the same requirements.
Another change for employers is the opportunity to offer employees "pension-linked emergency savings accounts" which will act as hybrids between emergency and retirement savings. Employers can automatically enroll workers at up to 3% of their salary, with a contribution cap of $2,500. Contributions to these emergency accounts will be taxed like Roth contributions and will qualify for employer matching. Employees can make four withdrawals per year from the account with no penalty or additional taxes. If they leave the company, they can withdraw the emergency account as cash or roll it over into a Roth account.
The Secure 2.0 Act will also allow companies to automatically transfer a participant's IRA into a retirement plan at a new employer unless the participant explicitly opts out. This will make it easier for employees to maintain their retirement savings when they change jobs. Additionally, the act provides administrators of retirement plans the option of deciding not to recoup overpayments accidentally made to retirees, and it enacts protections and limitations for retirees if companies do decide to take money back.
The Secure 2.0 Act of 2022 is set to bring significant changes to the way employers manage and administer retirement accounts for their employees. The act includes provisions for automatic enrollment, pension-linked emergency savings accounts, and the option for companies to automatically transfer a participant's IRA into a retirement plan at a new employer. Employers and employees should be aware of these changes and plan accordingly.
Overall, the Secure 2.0 Act of 2022 includes over 90 changes to retirement account rules, and while some changes will take effect immediately, others will start beginning in 2024. It is important for individuals to understand how these changes may impact their retirement savings and to consult with a financial advisor to determine the best course of action.