A second version of the SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law at the end of 2022, and it has some important changes for the aspiring retiree. Keeping on top of these changes and acting on them accordingly are keys to maintaining a sound financial plan.
Here are some of the biggest changes to come out of SECURE 2.0 and how they could affect you.
1. The RMD age is rising
The age at which required minimum distributions (RMDs) must begin from pretax retirement accounts rose from 72 to 73 as of Jan. 1. This won’t affect people already taking distributions from their retirement accounts, but it will affect those just reaching their 70s.
Retirees and RMDs are said to have a tumultuous relationship: Mandatory retirement distributions from pretax retirement accounts are taxed as ordinary income upon withdrawal, which can push a retiree into a higher tax bracket. This means that large pretax 401(k) accounts — usually a preferred location for long-term savings — also carry a hefty embedded tax liability.
To avoid especially costly RMDs in your mid-70s and beyond, pre-retirees might consider performing Roth conversions (converting money from pretax retirement accounts into Roth IRAs) in the years leading up. This can help a prospective retiree take advantage of market volatility and possibly lower tax rates as well. The RMD age will rise again to 75 in 2033.
2. The penalty for not taking your RMDs is dropping
Previously, failing to take your RMD on time (generally by Dec. 31 of the mandatory year) would result in a 50% penalty — a serious punishment for what, in many cases, boils down to a harmless oversight. Effective Jan. 1, 2023, the penalty for failure to take an RMD fell to 25%, and if the error is corrected in a reasonable and timely manner, the penalty will be further reduced to 10%.
And in select cases, you might be able to have the penalty waived entirely if you can demonstrate that your failure to take an RMD was the result of an understandable error. The IRS will likely make this decision on a case-by-case basis.
3. 401(k) plans have new auto-enrollment requirements
Starting in 2025, all employers offering a new 401(k) plan will be required to auto-enroll their employees into the plan. This is designed to help increase participation rates and to ultimately help employees develop a healthy habit of saving for the long term.
Employees can choose to opt out of the plan, though by doing so they’ll miss out on the chance for tax-deferred growth as well as employer matching contributions.
For people just entering the workforce or those changing careers, an auto-enrollment feature promises to be an exciting development.
4. The Saver’s Credit is getting a makeover
Currently, the Saver’s Credit exists to help lower-income individuals and families build a financial foundation. Under the new legislation, the Saver’s Credit would sunset in 2026, and in 2027 become the Saver’s Match. The new incentive would come to life as an additional deposit to an individual’s retirement account of up to 50% of contributions with a maximum match of $2,000.
The Saver’s Credit, as well as the Saver’s Match, are meant for single taxpayers earning in the mid-$30,000s and for married taxpayers earnings in the mid-$70,000s combined. These amounts are almost certain to change by the time the Saver’s Match is finally implemented in 2027.
Stay on top of rule changes
Being aware of changes to laws around retirement accounts is necessary if you want to maximize your long-term wealth. Again, the key to a successful retirement, at least from a numbers perspective, is to learn the basics of financial planning and act within the rules. Consult with a qualified financial planner if you need assistance in building your plan.