How the Secure Act 2.0 changes your retirement savings

The Secure Act 2.0 was signed into law on Dec. 29, 2022. With it comes a host of changes to the retirement landscape which will take place over the next few years. Below is a summary of the most important changes that could affect you whether you’re still saving for retirement or living off your retirement savings.  

The changes will impact people who are still saving for retirement.

Automatic enrollment
Beginning in 2025, new 401(K) and 403(b) plans must automatically enroll eligible employees at least at a 3% contribution level.  The plan can automatically enroll employees at a higher level, but not more than 10%. Contributions would automatically increase by 1% per year until ultimately reaching 10%. 

Additional catch-up contributions
Catch-up contributions to workplace plans are currently $7,500 for people aged 50 or older.  Beginning in 2025, people aged 60-63 will be able to make catch-up contributions up to $10,000.  Your income will also become a factor in the tax treatment of your catch-up contributions. Beginning in 2024, employees’ catch-up contributions must be made on a Roth basis if their prior year wages were above $145,000. 

529 residual assets
Beginning in 2024, 529 residual assets will be able to roll to the beneficiary’s Roth IRA.  However, there is a lifetime limit of $35,000 per beneficiary that can roll to a Roth IRA, and the 529 account must be at least 15 years old.  The rollovers are also considered contributions in the year they’re made.  Given the Roth IRA contribution limit in 2023 is $6,500, it should take multiple years to exhaust the $35,000 lifetime limit.  One additional benefit is that these rollover contributions are not subject to the income limits most Roth IRA contributions are. 

Employer match
Effective immediately, employers can offer to match their employees’ retirement plan contributions on a Roth basis rather than a pre-tax basis. Employees must be fully vested in this match to make the change to Roth. 

Beginning in 2024, employers are also allowed to match employees’ student loan payments by making a matching contribution to a retirement account based on the amount of the employee’s student loan payments made.  These matching contributions must be subject to the same vesting schedule as the other matching contributions. 

These changes will impact people who are accessing their retirement.

Required Minimum Distributions (RMDs)
There were multiple changes to RMDs.  Effective in 2023, the beginning age for RMDs is changing from 72 to 73 if you were born between 1/1/1951 and 12/31/1959.  The beginning age for RMDs will be 75 for those born on or after 1/1/1960.  

Beginning in 2023, the penalty for not taking your RMD will be reduced from 50% to 25% of the RMD amount not taken. 

Beginning in 2024, Roth employer-sponsored retirement plans will not be subject to RMDs. 

Additional penalty free withdrawals
Beginning in 2023, retirement account owners who are deemed terminally ill can withdrawal funds without incurring the 10% early distribution penalty. 

Beginning in 2024, retirement account owners can withdrawal up to $1,000 to cover emergency expenses without incurring the 10% early distribution penalty.  This $1,000 can be repaid to the account within 3 years. 

Qualified Charitable Distributions (QCDs)
Beginning in 2023, retirement account holders who are subject to RMDs can make a one-time gift to a split-interest entity of up to $50,000.  A split-interest entity could be a charitable remainder unitrust, charitable remainder annuity trust, or a charitable gift annuity. This $50,000 would be part of their overall QCD limit for the year.  

The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.  MAI Capital Management, LLC (“MAI”) is a SEC registered investment adviser.